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EDITORS : 

Prof.  GILBERT  MURRAY,  D.Litt.,  LL.D.,  F.B.A. 
The  Rt.  Hon.  HERBERT  FISHER,  LL.D.,  F.B.A. 
Prof.  J.  ARTHUR  THOMSON,  M.A.,  LL.D. 
Prof.  WILLIAM  T.   BREWSTER,   M.A. 


256  pages.        -  -In  cloth  or  leather  binding. 


HISTORY  AND   GEOGRAPHY 

3.  THE  FRENCH  REVOLUTION,     By  HILAIRB  BSLLOC,  M.A.    (With 

Haps.) 

4.  A  SHORT  HISTORY  OF  WAR  AND  PEACE.    By  G.  H.  PKRRIS. 

8.  POLAR  EXPLORATION.     ByDrW.  S.  BRUCE,  F.R.S.E.,  Leader  of  the 
Scotia.  Expedition.    (With  Maps.) 

12.  THE  OPEN1NG-UPOF  AFRICA.    By  Sir  H.  H.JOHNSTON,  G.C.M.G., 

F.Z.S.    (With  Maps.) 

13.  MEDIAEVAL  EUROPE.     By  H.  W.  C.  DAVIS,  M.A.    (With  Maps.) 

14.  THE    PAPACY   AND    MODERN  TIMES  (1303-1870).     By  WILLIAM 

BARRY,  D.D. 

23.  HISTORY  OF  OUR  TIME  (1885-1913).    By  G.  P.  GOOCH,  M.A. 

25.  THE  CIVILISATION  OF  CHINA.    By  H.  A.  GILES,  LL.D.,  Professor 
of  Chinese  at  Cambridge. 

29.  THE  DAWN  OF  HISTORY.    By  J.  L.  MYRBS-,  M.A.,  F.S.A. 

33.  THE  HISTORY  OF  ENGLAND.    By  Prof.  A.  F.  POLLARD,  M.A.  (With 

a  Chronological  Table.) 

34.  CANADA.    By  A.  G.  BRADLEY. 

37.  PEOPLES  AND  PROBLEMS  OF  INDIA.    By  Sir  T.  W.  HOI.DKKNKSS, 


42.  ROME.    By  W.  WARDK  FOWLER,  M.A. 
48.  THE  AMERICAN  CIVIL  WAR.    By  F.  L.  PAXSON. 
51.  WARFARE  IN  BRITAIN.     By  HH.AIRE  BEI.LOC,  M.A. 
56.  MASTER  MARINERS.     By  J.  R.  SPEARS. 


i  ON.     Hy  the  Kl.  II 
6fl.  TMK    NAVY  R.     |:y  DAVIM  HA 

ES  TOWER. 

81  I' r  1C    BRITAIN.     MyRoiiEKi-M  i.L.D., 

.ted.) 

91.  THK   ALPS.     By  \.    (Illustrated.) 

92.  CKNTkAL   AND   SOI'TII    AMKkH 

97.  T!,  By  I).  G.  HOGARTH,  M.A.    (Maps.) 

98.  \\  ;>   AND  AMKR1CA.    By  Prof.  T.  C. 

M.A. 
100.   1  •>¥  SCOTLAND.     Hy  Prof.  R.  S.  RAIT. 

;:y  R.  C.  K.  :  ,ps.) 

•LAND.     liy  I'r  ,f.   \V.  Akis,,:;  PIIIU.II-S.     (With  Maps.) 
\.     My  L.  F.  WA 

LITERATURE  AND  ART 

\KK.      HyJoHN.M; 
ITKKATURK:     ^  !:>•  G.   H.  MAIK.  M.A. 

89.  ARCH:  .V    K.  LKTHAI-V.     (lllu>ti:.-- 

••'<;I.ISH  i  !  .  KKK..M.A 

4D.  T!' 

i;ICA.     By  Prof.  J.  ERXKINK  ar, 

83.  P.MNT1.KS  AND  PAIN,  :  '  -ir  FREDRBICI  (\Vi: 

("-tone  Illustrations.)     From  the  Piimitivcs  to  the  Im. 
\   AND  HIS  C1RCI.K.     Hy  JOHN  BAILKV, 

I;ERM.\N\.    !••>-  r'u.r 

M.A. 

IN  UIKKATURK.     ByG.  K.( 

of  ) 

T  AND  Kl  I  UAL.    i:>  Jv  K  I,  MAKR!-J-.,I.I..D.,D.Lit: 
\ND    HIS  ACF..     I'.y  (ini.KRT  MUKKAV,  D  Lilt  ,  LL  D 

•••.ACE  E.  HADOW. 
IS:     HIS    \VoKk  I.UKNCE.     , 

!  .    Ry  J.  M.  ROBERTSON,  M.K 
LITKRATURE.    By  Hon.  MAURICE 

IDS.  Mil  IOIIN  BAU.E-. 

SCIENCE 

•• 

m,  M.A  ,  F.itS. 

IT.   li;  M.D. 


IS.  INTRODUCTION  TO  MATHEMATICS.  By  A.  N.  WHITEHEAD, 
Sc.D.,  F.K.S.  (With  Diagrams.) 

19.  THE  ANIMAL  WORLD.     By  Prof.  F.  W.  GAMBLE,  F.R.S.    With  Intro- 

duction  by  Sir  Oliver  Lodge.     (Many  Illustrations.) 

20.  EVOLUTION,     liy  Prof.  J.  ARTHUR  THOMSON,  M.A.,  and  Prof.  PATRICK 

GEDDES. 

22.  CRIME  AND  INSANITY.    By  Dr  C.  A.  MERCIER. 
28.  PSYCHICAL   RESEARCH.     By  Sir  W.  F.  BARRETT,  F.R.S. 

31.  ASTRONOMY.       By  A.   R.   HINKS,  M.A.,  Chief  Assistant,  Cambridge 

Observatory. 

32.  INTRODUCTION  TO  SCIENCE.    By  J.  ARTHUR  THOMSON,  M.A. 
36.  CLIMATE  AND  WEATHER.      By  Prof.  H.  N.  DICKSON,  D.Sc.Oxon., 

M.A.,  F.R.S.E.    (With  Diagrams.) 
41.  ANTHROPOLOGY.    By  R.  R.  MARETT,  M.A. 
44.  THE  PRINCIPLES  OF  PHYSIOLOGY.    By  Prof.  J.  G.  MC.KENDRICK, 

M.D. 

46.  MATTER  AND   ENERGY.    By  F.  SODDV,  M.A.,  F.R.S. 

49.  PSYCHOLOGY,    THE    STUDY    OF    BEHAVIOUR.       By  Prof.    W. 

McDoucALL,  F.R.S.,  M.B. 

53.  THE  MAKING  OF  THE  EARTH.    By  Prof.  J.  W.  GREGORY,  F.R.S. 

(With  38  Maps  and  Figures.) 

57.  THE   HUMAN   BODY.     By  A.  KEITH,  M.D.,  LL.D.     (Illustrated.) 

58.  ELECTRICITY.     By  GISBERT  KAPP,  D.Eng.    (Illustrated.) 

02.  THE  ORIGIN  AND  NATURE  OF  LIFE.  ByDr  BENJAMIN  MOORE, 
Professor  of  Bio-Chemistry,  University  College,  Liverpool. 

67.  CHEMISTRY.  By  RAPHAEL  MEI.DOI.A,  F.R.S.  Presents  clearly  the  way 
in  which  chemical  science  has  developed,  and  the  stage  it  has  reached. 

7-2.  PLANT   LIFE.     By  Prof.  J.  B.  FARMER,  D.Sc.,  F.R.S.     (Illustrated.) 

78.  THE  OCEAN.     A  General  Account  of  the  Science  of  the  Sea.     By  Sir 

JOHN  MUUKAV,  K.C.B.,  F.R.S.     (Colour  Plates  and  other  Illustrations.) 

79.  NERVES.     By  Prof.  D.  FRASER  HARRIS,  M.D.,  D.Sc.    (Illustrated.)    A 

description,  in  non-technical  language,  of  the  nervous  system,  its  intricate 
mechanism,  and  the  strange  phenomena  of  energy  and  fatigue,  with  some 
practical  reflections. 

86.  SEX.    By  Prof.  PATRICK  GEDDES  and  Prof.  J.  ARTHUR  THOMSON,  LL.D. 

88.  THE  GROWTH  OF  EUROPE.  By  Prof.  GRENVILLE  COLE.  (Illus- 
trated.) 

PHILOSOPHY  AND  RELIGION 

15.  MOHAMMEDANISM.     By  Prof.  D.  S.  MARGOI.IOUTH,  M.A.,  D.Litt. 
40.  THE     PROBLEMS    OF     PHILOSOPHY.      By  the   Hon.    BERTRAND 
RUSSELL,  F.R.S. 

47.  BUDDHISM.     By  Mrs  RHYS  DAVIDS,  M.A. 

50.  NONCONFORMITY:  ITS  ORIGIN  AND  PROGRESS.    By  Principal 

W.  B.  SKLBIE,  M.A. 

54.  ETHICS.     By  G.  E.  MOORE,  M.A. 

56.  THE  MAKING  OF  THE  NEW  TESTAMENT.  By  Prof.  B  W 
BACON,  LL.D.,  D.D. 

60.  MISSIONS  :  THEIR  RISE  AND  DEVELOPMENT.  By  Mrs 
CREIGHTOX. 

os.  COMPARATIVE:  RELIGION.    By  Prof.  n,  D.i.itt. 

7-J.  A  HISTORY  OK  FREEDOM  OK  THOUGHT.  liy  )  Ji  BURY 
Litt.D.,  LL.D. 


8«.  LIII'KAIURK   OK   THE   OLD   TK>1. \MKNI.      By  Prof.  GEO«C.« 

Mex.RK,  I' 

90.  THE  CHURCH   •'!  Canon  E.  W.  WATSON. 

»4.  RELIGIOUS  !  S  THE  OLD  AN!' 

By  Canon  R.  H.  CHAM.KS,  D.D.,  D.Litt. 
102.  HISTORY  OF   PHILOSOPHY.    By  CI.KMBNT  C.  J.  WEBB. 

SOCIAL   SCIENCE 

1.  PARLIAMENT.     Its     History,    Constitution,    »nd     Practice.      By    Sir 

COURTENAV  P.  ILHHRT,  G.C.B.,  K.( 

6.  THE  STOCK  EXCHANGE.   By  F.  W.  HIRST,  Editor  of  Tkt  Ectmomiit. 
6.  IRISH    NATIONALITY.     By  Mrs  J.  R.  GKREN. 

10.  THE  SOCIALIST  MOVEMENT.    By  J.  RAMSAV  MACDOWALD,  M.P. 

11.  CONSERVATISM.    By  LORD  HUGH  CECIL,  M.A.,  M.P. 
16.  THE  SCIENCE  OF  WEALTH.     By  J.  A.  HOBSON,  M.A. 
21.  LIBERALISM.    By  L.  T.  HOBIIOUSE,  M.A. 

24.  THE   EVOLUTION   OF   INDUSTRY.     By  D.  H.  M.KV.KFG..K,  M.A. 
26.  AGRICULTURE.     By  Prof.  W.  SOMERVM.LB,  ! 

*).  ELEMENTS  OF  ENGLISH  LAW.  By  W.  M.  GEI.I.ABT,  M.A.,  B.C.I.. 
38.  THE   SCHOOL:     AN    INTRODUCTION    TO   THE    STUI>\ 

EDUCATION.     By  J.  J.  FINDI.AY,  MA.,  Ph.D. 

NTS  OF  POLITICAL  ECONOMY.    By  S.  J.  CHAPMAN,  M.A. 
69.  THE    NEWSPAPER.      By  G.  BINNEY  DIBBLEE,  M.A.     (Illustrated.) 

The  best  account  extant  of  the  organisation  of  the  newspaper  press,  at 

home  and  abroad. 
77.  SHELLEY,  GODWIN,  AND  THEIR  CIRCLE.  By  H.  N.  BRAIUSKOKI,, 

M.A. 

80.  CO-PARTNERSHIP     AND      PROFIT-SHARING,       By    AN-EURIN 

WILLIAMS,  M.A. 

81.  PROBLEMS  OF  VILLAGE   LI  i  \.  BEICNETT,  M.A. 
88.  COMMON-SENSE   IN   LAW.    By  Prof.  P.  VINOGEADOKF,  D.C.L. 
85.  UNEMPLOYMENT.     By  Prof.  A.  C.  PIGOU,  M.A. 

96.  POLITICAL    THOUGHT    IN    ENGLAND:    FROM    BACON    TO 

H  \LIFAX.     ByG.  P.  GOOCH,  M  A. 
104.  POLITICAL  THOUGHT   IN   ENGLAND:   FROM  SPENCER  TO 

THE  PRESKA  I    DAY.     r.y  ERNEST  BARKKB.  M.\. 
in«.  POLITICAL  THOUGHT  IN  ENGLAND:  THE  UTILITARIANS 

FROM     BKNTHAM     1O    J.     S.     MILL.       By   W.    L.    DAVIDSON, 

M.A.,  LL.D. 


Many  other  future  volumes  la  preparation. 


LONDON:  WILLIAMS  AND  NORGATE 

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HOME   UNIVERSITY   LIBRARY 
OF  MODERN    KNOWLEDGE 


THE   SCIENCE   OF   WEALTH 

BY  J.   A.    HOBSON,    M.A. 


LONDON 
WILLIAMS   &   NORGATE 

HENRY    HOLT  &   Co.,  NEW    YORK 
CANADA  :  WM.  BRIGGS,  TORONTO 
IKDIA  :  R.  &  T.  WASHBOURNE,  LT» 


HOME 

UNIVERSITY 

LIBRARY 

OF 

MODERN  KNOWLEDGE 

Editors  : 
HERBERT  FISHER,  M.A.,  F.B.A.,  LL.D. 

PROF.    GILBERT    MURRAY,    D.LlTT., 
LL.D.,  F.B.A. 

PROF.  J.  ARTHUR   THOMSON,  M.A., 
LL.D. 

PROF.   WILLIAM  T.   BREWSTER,  M.A. 
(Columbia   University,   U.S.A.) 


NEW 

HENRY    HOLT 

YORK 

AND   COMPANY 

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If  THF    SCTFNCF     W 

ffia  * 

ooft 

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OF  WEALTH 

BV 

J.  A.  HOBSON,  M.A. 

AUTHOR  OF  "THE  INDUSTRIAL 
SYSTEM,"      "INTERNATIONAL 
TRADE,"  "THE  EVOLUTION  or 

MODERN   CAPITALISM,"   "  JOHN 
RUSKIN,     SOCIAL     REFORMER," 
BTC. 

:...    |                                                                 j  u 

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LONDON 

WILLIAMS  AND    NORGATE 

ftrtt  print.d  J*iu  1911 
Rrnt'd  and  prinUJ  Julf  ItU 
Meprinttd  October  1818 

Dtctmbtr  1918 

Jtforc/i  1919 


LIBRARY 

UNIVERSITY  OF  CAUFORNIS 
SANTA  BARBARA 


CONTENTS 

OHAV.  PAGH 

I     THE   MEANING   OP  WEALTH       ...  9 

I 

II      THE   BUSINESS  AND  THE  TRADE        .            .  17 

III  THE   INDUSTRIAL   SYSTEM           ...  30 

IV  HOW  THE  INDUSTRIAL  SYSTEM  WORKS      .  42 
V      COSTS  AND   SURPLUS         ....  64 

VI      UNPRODUCTIVE  SURPLUS            .            .            .  87* 

VII      WAGES 117 

VIII      PROFITS 141 

IX      EXCHANGE   AND   PRICES               .             .             .  164 

X      DEMAND   AND   SUPPLY     ....  183 

XI     THE      LABOUR      MOVEMENT      AND      STATE 

SOCIALISM 208 

Xn      FOREIGN  TRADE 231 

XIII      HUMAN  VALUES      .                        .  249 


The  following  volume*  of  kindred  interest  haw  been 
published  in  the  Some  University  Library: 

5.  The  Stock  Exchange.     By  F.  W.  Hirst. 

24.  The  Evolution  of  Industry.     By  Prof.  D.  H.  Macgregor. 

59.  Element*  of  Political  Economy.    By  Prof.  S.  J.  Chapman. 

85.  Unemployment.     By  Prof.  A.  C.  Pigou. 


PREFACE 

THIS  volume  contains  a  study  of  the 
structure  and  working  of  the  modern 
business  world  in  which  wealth  is  made  and 
distributed  as  income  to  those  who  have  made 
it  or  can  lawfully  get  hold  of  it.  It  describes 
the  ways  in  which  the  productive  powers  of 
Labour,  Ability,  Land,  Capital,  and  Society 
are  applied  in  the  various  trades,  arts,  and 
professions,  for  the  production  of  material 
goods  and  services,  and  the  ways  in  which 
the  payment  for  this  work  is  regulated  and 
carried  out.  No  knowledge  of  economic 
facts  or  principles  is  presumed,  except  such 
as  every  intelligent  man  or  woman  acquires 
in  the  ordinary  experience  of  life. 

So  brief  a  presentation  of  so  large  a  subject 
will  suffer  necessary  defects.  It  will  be  apt 
to  be  too  unqualified  in  statement  and  too 
dogmatic  in  mode  of  argument.  It  will 
shirk  some  important  points  of  controversy. 

Since  the  line  of  interpretation  taken  here 
has  been  more  fully  defended  in  a  larger 
volume  entitled  The  Industrial  System,  I 
may  be  permitted  to  refer  to  it  those  readers 
who  may  wish  to  follow  out  the  argument  in 
more  detail. 

J.  A.  HOBSON 


NOTE   ON   BOOKS 

STTTDBNTS  desiring  to  follow  the  growth  of  the  Science 
of  Wealth  in  this  country  will  begin  with  Adam  Smith's 
Wealth  of  Nations,  following  with  Ricardo's  Principles, 
and  J.  S.  Mill's  Principles  of  Political  Economy  for  the 
"  classical  "  theory.  In  Jevons'  Theory  of  Political 
Economy  they  will  find  a  challenge  to  the  older  theory, 
and  a  new  interpretation  of  economic  "  value."  The 
best  authoritative  statement  of  modern  "  orthodox " 
theory  is  in  Marshall's  Principles  of  Economics  (Macmillan), 
while  Philip  H.  Wicksteed's  Common  Sense  of  Political 
Economy  (Macmillan)  presents  a  valuable  psychological 
interpretation. 

A  reliable  brief  account  of  the  growth  of  the  science  may 
be  found  in  L.  L.  Price's  Political  Economy  in  England 
(Methuon),  whilst  E.  Cannan  presents  a  very  useful 
criticism  of  much  of  the  earlier  work  in  hi*  Theories  of 
Production  and  Distribution  (P.  S.  King).  In  Forwell's 
Introduction  to  Monger's  Right  to  the  Whole  Produce  of 
Labour  is  found  an  interesting  account  of  the  beginnings 
of  socialistic  theory  hi  England,  in  connection  with  which 
Hyndman's  Economics  of  Socialism  and  Bernstein's 
Kvolutionary  Socialism  may  be  read. 

For  a  fuller  statement  of  the  method  of  description  and 
interpretation  adopted  in  this  volume  I  may  refer  to  my 
Evolution  of  Modern  Capitalism  (Scott)  and  The  Industrial 
System  (Longmans).  Among  innumerable  special  studies 
of  the  fact*  and  problems  of  modern  industry,  I  would 
refer  among  the  larger  works  to  Booth's  Life  and  Labour 
in  London  .Macmillan),  and  Rowntroe's  Poverty  (Mac- 
millan), Schloas's  Methods  of  Industrial  Remuneration 
(Williams  and  Norgate),  Dr.  Shad  well's  Industrial  Effici- 
ency (Longmans),  and  Brassey  and  Chapman's  Work  and 
Wagfs  (Longmans).  But  the  largest  ordered  mass  of 
information  upon  preaent-day  industrial  conditions  lies 
in  the  Reports  of  the  Poor  Law  Commission. 

On  Finance  two  excellent  elementary  textbooks  may 
be  found  in  Withers'  The  Meaning  of  Money  (Methuenj, 
and  Armitage  Smith's  Principles  and  Methods  of  Taxation 
(Murray). 


THE   SCIENCE   OF  WEALTH 

CHAPTER  I 

THE    MEANING    OF   WEALTH 

COMMON  usage  in  the  present  day  confines 
the  term  "  Wealth  "  to  things  capable  of  being 
bought  and  sold,  measuring  the  amount  of 
wealth  they  represent  by  the  quantity  of 
money  they  would  fetch  in  the  market.  When 
we  think  and  speak  of  "  a  wealthy  man,"  we 
reduce  to  terms  of  money  all  his  saleable 
possessions,  including  not  only  the  lands, 
buildings,  machinery,  materials,  cash,  he 
owns  and  employs  for  business  purposes, 
together  with  the  share  certificates  and  other 
paper  documents  which  give  him  claims  upon 
the  produce  of  the  future,  but  also  his  house, 
furniture,  pictures,  books  and  other  private 
possessions  which  he  has  no  intention  of 
selling.  All  have  their  market  value  and  his 
"  wealth  "  is  the  sum  of  these  values. 

The  "  wealth  "  of  a  nation  may  be  estimated 
in  a  similar  manner.  Taken  at  any  given 
A  2  9 


10       THE  SCIENCE   OF  WEALTH 

time,  it  will  consist  of  the  total  sum  of  market- 
able goods  owned  by  the  State  and  by  the 
citizens  who  are  the  units  of  the  nation.  It 
will,  of  course,  include  some  goods  which  lie 
abroad  in  foreign  countries,  and  will  exclude 
some  goods  which,  though  lying  inside  the 

mtry,  belong  to  foreigners. 

The  wealth  of  Great  Britain,  thus  conceived, 
will  not  include  any  money  estimate  of  her 
geographical  position  or  climate,  or  any  other 
natural  advantages  which  are  of  use  for 
individual  and  commercial  purposes.  The 
Thames,  as  a  business  asset  for  the  nation, 
will  only  rank  as  national  wealth  indirectly, 
in  so  far  as  it  affords  facilities  to  businesses 
engaged  in  the  carrying  trade.  There  are 
two  good  reasons  for  excluding  these  natural 
advantages  from  a  business  estimate  of 
national  wealth.  In  the  first  place,  they  are 
not  for  sale  and  no  market  valuation  can  be 
set  on  them.  Secondly,  if  such  a  valuation 
of  climate,  position,  harbourage,  etc.,  were 
attempted,  it  would  cause  overlapping  and 
duplication  in  the  "  national  accounts,"  for 
all  these  natural  advantages,  utilized  as 
they  are  for  countless  purposes  in  private 
businesses,  would  then  be  reckoned  twice 
over. 

Thus,  whether  we  regard  individuals  or 
nations,  it  will  be  convenient  for  business 
purposes  to  confine  "  wealth  "  to  marketable 


THE  MEANING  OF  WEALTH        11 

articles  taken  at  their  market  value.  This 
rule  has  its  difficulties  and  its  defects.  Things 
which  are  "  wealth  "  in  one  place  or  at  one 
time  are  not  wealth  in  another  place  or  at 
another  time.  When  the  population  of  a 
country  grows,  much  land  which  was  not 
wealth  becomes  wealth :  water,  air  and 
sunshine  pass  from  "  free  "  into  marketable 
goods  in  the  rise  of  city  rents.  Though  slave 
labour  is  far  less  productive  than  free  labour, 
the  emancipation  of  slaves  in  the  United 
States  cancelled  a  vast  amount  of  private 
wealth. 

Again,  reckoning  wealth  by  market  prices 
not  merely  implies  a  constant  change  in 
the  amount  of  wealth  any  particular  goods 
represent,  but  changes  in  the  wealth  of  a 
nation,  or  of  the  world,  without  any  corre- 
sponding change  in  the  quantity  or  quality  of 
the  "  goods."  A  general  rise  or  fall  of  prices, 
due  to  monetary  causes,  will  thus  produce  a 
shrinkage  or  an  expansion  of  "  wealth  "  which 
has  no  substance.  Though  statists  can  make 
corrections  of  such  errors,  the  reliance  upon 
current  prices  as  the  measure  of  "  wealth  " 
will  continue  to  be  a  source  of  some  confusion 
in  the  study  of  wealth. 

When  stock  is  taken  of  the  things  which 
constitute  "  wealth,"  the  ordinary  conception 
of  it  will  be  found  too  materialistic.  The 
good-will  of  a  business  must  rank  as  wealth, 


12       THE   SCIENCE   OF  WEALTH 

just  as  much  as  its  factory  buildings  :  though 
immaterial,  it  is  saleable.  Sometimes  it  has 
been  contended  that  the  efficiency,  skill  and 
other  qualities  of  business  ability  or  labour 
power,  should  be  reckoned  in  the  national 
wealth.  But  this  would  be  wrong.  Under 
slavery  the  productive  capacities  of  the  slave 
are  parts  of  the  saleable  commodity  he  is; 
but  when  persons  are  not  wealth  neither  are 
the  capacities  that  are  inseparable  from  them. 
Only  the  particular  services  which  they  can 
render  and  hand  over  to  a  purchaser  are 
wealth.  Thus  the  skill  or  knowledge  of  a 
doctor  is  not  wealth,  but  the  operation  he 
performs  or  the  opinion  which  he  gives  upon 
a  case  is  wealth.  So  it  is  with  all  sorts 
of  professional  and  personal  service.  The 
cooking  and  the  waiting  are  wealth  in  the 
same  sense  as  the  food  which  they  prepare 
and  serve  :  the  lesson  ranks  as  wealth  on 
equal  terms  with  the  text-book.  Where, 
however,  personal  skill  or  effort  is  applied  to 
material  goods  so  as  to  change  their  form  or 
place,  it  is  usual  to  consider  this  skill  or  effort 
as  entering  into  the  goods  and  so  adding  to 
their  wealth.  So  wage-labour  and  work  of 
management  are  not  commonly  accounted 
wealth,  but  are  included  in  the  wealth  of 
the  goods  they  help  to  produce.  In  reckon- 
ing wealth  from  the  social  standpoint  it 
is  clear  that  they  cannot  be  counted  both 


ways,  and  it  is  far  more  convenient  to  count 
them  in  the  goods  whose  market  value  they 
enhance. 

If  stock  were  taken  at  a  particular  moment 
of  the  wealth  of  a  man  or  of  a  nation,  of 
course  only  material  forms  would  count,  for 
services  involve  a  lapse  of  time.  But 
professional,  domestic,  recreative  and  other 
services,  which  are  not  merely  applied  to  the 
production  of  material  goods,  must  evidently 
rank  as  separate  sorts  of  wealth,  if  they  are 
sold.  In  any  inventory  of  the  wealth  of  a 
nation  taken  over  a  period  of  time  they  must 
be  included.  The  part  they  play  in  the 
general  fund  of  wealth  will  be  more  evident 
when  we  treat  of  "  income." 

The  arrangements  for  producing  or  pro- 
curing these  various  sorts  of  tangible  or 
intangible  wealth  we  call  the  economic  or 
industrial  system.  The  latter  term  it  will  be 
more  convenient  to  use.  But  it  will  require 
a  stretching  of  the  term  "  industry,"  so  as  to 
cover  all  those  activities  which  go  to  make 
any  sort  of  wealth,  including  the  services  of 
the  judge,  the  clergyman,  the  acrobat,  or 
the  trade-union  secretary.  So  not  only  the 
extractive  industries  of  agriculture  and  mining, 
the  manufacturing,  transport  and  distributive 
trades  concerned  with  material  goods,  but  the 
work  of  government,  the  learned  professions, 
the  fine  arts,  all  gakjul  recreations  and  amuse- 


14       THE   SCIENCE   OF   WEALTH 

ments,  must  be  brought  under  the  "  industrial 
system." 

The  product  of  all  these  forms  of  industry 
is  wealth  and  its  amount  is  estimated  at  its 
market  prices. 

There  is,  however,  another  broader  and 
widely  different  use  of  the  term  wealth  which 
identifies  it  with  human  welfare  or  well-being. 
"  There  is  no  wealth  but  life.  Life,  including 
all  its  powers  of  love,  of  joy  and  of  admiration. 
That  country  is  the  richest  which  nourishes 
the  greatest  number  of  noble  and  happy 
human  beings  ;  that  man  is  richest  who, 
having  perfected  the  functions  of  his  own  life 
to  the  utmost,  has  also  the  widest  helpful 
influence,  both  personal  and  by  means  of  his 
possessions,  over  the  lives  of  others."  l 

John  Ruskin  and  some  other  prophets  of 
this  wider  wealth  have  denied  the  validity 
and  the  utility  of  the  narrower  Political 
Economy.  Mere  statements  about  marketable 
goods,  measured  in  terms  of  money,  do  not, 
they  urge,  afford  any  useful  information  as  to 
the  effects  of  their  production  and  consump- 
tion upon  human  life  and  happiness.  Other 
students  of  society  have  also  questioned  the 
validity  of  separating  the  study  of  economic 
processes  from  that  of  other  social  processes 
and  making  of  them  a  "  science  "  of  industry. 

This  criticism,  so  far  as  it  has  point,  is 
1  Ruskin,  Unto  this  Last. 


THE  MEANING  OF  WEALTH      15 

applicable  to  all  scientific  specialism.  The 
whole  world  of  phenomena  is  a  unity  of 
intimately  connected  parts,  and  every  break- 
ing off  of  any  section  for  separate  study  is  of 
necessity  an  act  of  mutilation.  But  such 
separate  studies  are  essential  to  intellectual 
progress,  and  the  mutilation  is  not  fatal  to 
their  use,  provided  that  it  is  kept  in  mind,  and 
the  subject  of  the  special  study  is  not  treated 
as  a  completely  rounded  whole.  The  chief 
danger  from  such  scientific  specialism  arises 
where  the  science  is  made  into  the  basis  of  an 
art  and  maxims  of  human  conduct  are  erected 
on  it.  The  scientific  study  of  industry  may 
show  that  certain  acts  of  individual  or 
national  policy  make  for  an  increase  of 
marketable  wealth.  To  convert  this  "is" 
into  a  "must,"  and  to  urge  this  discovery  as 
a  sufficient  ground  for  individual  or  national 
conduct,  without  taking  into  due  account 
other  effects  upon  public  welfare  which  may 
or  must  arise  from  this  commercially  profitable 
policy,  is  evidently  unjustifiable.  For  when 
a  person  or  a  nation  is  considering  what  line 
of  conduct  to  pursue,  he  must  take  into  account 
at  one  and  the  same  time  all  the  probable 
advantages  and  disadvantages.  In  a  word, 
he  must  take  for  his  criterion  of  conduct  the 
wider  standard  of  wealth  which  identifies  it 
with  welfare.  The  advice  which  the  mere 
economist  may  offer  to  the  statesman  must 


16       THE   SCIENCE  OF  WEALTH 

therefore  always  be  adjusted  or  corrected  by 
reference  to  this  larger  conception  of  the 
public  good.  An  immediately  or  even  a 
permanently  profitable  business  policy  may 
be  negatived  by  considerations  of  wider 
utility. 

But  these  admissions  do  not  mean  that 
either  a  science  or  an  art  of  industrial 
wealth  is  invalid.  On  the  contrary,  both 
are  essential  to  the  progress  of  the  wider 
science  and  the  wider  art  of  "  politics  "  or 
social  conduct.  Not  only  do  we  need  to 
learn,  by  separating  the  industrial  from  the 
other  social  phenomena  for  closer  inspection, 
how  the  industrial  system  is  made  and  works, 
but  we  also  need  to  know  what  are  likely  to 
be  the  effects  of  proposed  changes  upon  the 
working  of  this  system  and  the  quantity  of 
marketable  wealth  it  yields.  Both  sorts  of 
knowledge  are  of  service  to  citizens  and 
statesmen.  Neither  is  sufficient  as  a  guide 
to  conduct  :  both  are  but  tributaries  to  the 
wider  current  of  information  that  helps  to 
mould  the  policy  of  the  commonwealth. 


CHAPTER  II 

THE    BUSINESS    AND    THE    TRADE 

To  a  young  man  first  entering  an  occupa- 
tion as  an  artisan,  clerk,  tradesman  or  pro- 
fessional man,  the  larger  business  world 
necessarily  appears  as  a  confused,  intricate 
mass  of  vague  forms  and  happenings,  frag- 
ments of  which  float  before  his  vision  and  his 
mind  in  the  talk  of  his  friends  and  neighbours, 
in  the  columns  of  the  newspapers,  in  shop- 
windows  and  street  life,  and  in  the  acts  of 
retail  purchase  in  which  he  spends  his  earn- 
ings. His  single  focus  of  clear  vision  is 
furnished  by  the  definite  regular  work  in 
which  he  is  personally  engaged.  The  unity 
of  industry,  the  very  notion  of  it  as  a  system, 
long  remains  hidden  from  him,  or  is  at  best 
a  vague  generalization.  But  the  reality,  the 
structure  and  the  working  of  the  business 
establishment  to  which  he  is  attached  soon 
impress  themselves  clearly  on  his  mind. 

Though  at  first  he  may  know  intimately 

only  the  process  in  which  he  works  and  the 

other  workers  doing  similar  work  near  him, 

he   soon   picks   up   some   knowledge   of   the 

17 


18         THE  SCIENCE  OF  WEALTH 

other  processes  in  his  department,  and,  as  he 
moves  about  and  makes  acquaintance  with 
his  fellows,  he  learns  more  of  what  goes  on  in 
other  departments.  If  it  is  a  manufacture, 
he  sees  the  raw  materials  and  the  finished 
products,  and,  according  to  his  intelligence 
and  interest,  gets  to  know  something  about 
the  machinery  and  the  skill  used  in  the 
several  stages  of  the  manufacture.  Gradually 
he  will  acquire  a  clear  grasp  of  the  business 
organization  which  underlies  the  manufac- 
turing processes,  the  work  of  overseers  and 
of  the  management,  some  comprehension  of 
what  goes  on  in  the  office  where  the  clerks 
are  registering  all  the  doings  of  the  factory. 
Even  of  the  acts  of  buying  and  selling  most 
remote  from  his  personal  part  he  may  get 
some  understanding,  especially  if  he  is  organ- 
ized in  a  trade  union  with  his  fellows  and 
learns  the  ways  in  which  buying  and  selling 
may  affect  his  work  and  wages. 

An  intelligent  operative  thus  builds  for  him- 
self a  pretty  accurate  image  of  the  material 
structure  and  the  personnel  of  the  factory  or 
workshop  in  which  he  is  engaged.  The  pre- 
mises, the  buildings,  the  machinery  and  tools, 
the  power,  the  raw  materials  and  produce  at 
various  stages  of  manufacture,  some  money 
in  the  till  and  the  bank,  the  various  grades 
of  employees  and  the  management,  will  stand 
out  as  distinguishable  features.  The  clerk 


BUSINESS   AND   TRADE  19 

in  the  factory  office,  the  timekeeper,  the 
manager,  will  see  substantially  the  same 
picture,  but,  looking  at  it  from  a  different 
angle  of  vision,  they  will  see  or  realize  some 
parts  more  clearly  than  others,  and  assign  a 
different  importance  to  the  different  parts. 
Disregarding  human  considerations  and  re- 
garding the  factory  merely  as  an  industrial 
instrument,  it  will  be  seen  that  the  manager 
is  in  the  best  position  to  assess  the  relative 
importance  of  the  various  factors  as  co- 
operative parts  in  the  business.  This  does 
not  imply  that  the  manager  is  more  unbiassed 
or  disinterested  in  his  motives  and  his  judg- 
ments than  the  workman.  In  both  cases 
special  interests  will  to  some  extent  distort 
vision  and  valuation.  The  advantage  of 
the  manager  is  a  technical  one :  he  is  in  a 
better  position  than  the  process-worker  to 
see  the  various  parts  of  the  business  in  their 
several  sizes  as  contributory  to  the  whole. 
For  management,  as  we  shall  recognize,  is  the 
unifying,  cohesive  and  adjusting  factor  in 
the  business  :  the  manager  also  alone  knows 
the  monetary  "  cost  "  which  each  involves, 
and  has  thus  a  common  standard  measure  of 
importance  which  he  can  apply.  For  these 
reasons  it  is  desirable  that  an  operative  or 
clerk,  who  seeks  to  get  a  most  reliable  image 
of  the  business,  should  try  to  supplement 
his  wage-earning  point  of  view  by  seeking 


20       THE  SCIENCE  OF  WEALTH 

to  assume  that  of  the  manager  and  to  realize 
how  the  business  looks  from  that  situation. 

The  business,  or  smallest  organized  unit 
of  industry,  thus  roughly  visualized,  would 
take  some  such  shape  as  this 


If  instead  of  a  factory,  we  took  a  mer- 
cantile establishment,  a  mine,  a  retail  shop, 
a  farm,  though  all  the  details  would  be 
different,  the  general  structure  would  be 
found  to  be  the  same.  Raw  materials, 
stock,  tools,  premises,  labour  and  manage- 
ment would  all  be  there  co-operating  to  a 
single  industrial  end,  though  in  widely 
different  proportions.  In  a  commercial 
house,  plant  would  play  a  much  smaller 
part,  there  being  little  machinery  or  tools; 
materials  and  stock  would  be  only  a  different 
arrangement  of  the  same  goods,  and  money 
would  figure  more  prominently.  In  the  farm, 
as  in  a  mine,  premises,  including  land,  would 
of  course  bulk  far  more  largely  than  in  a 


BUSINESS   AND   TRADE  21 

factory.  Again,  many  businesses  are  not 
tightly  contained  in  single  premises.  A  brick- 
layer, working  for  a  firm  of  builders,  will 
realize  the  business  as  consisting,  not  in  a 
fixed  yard  and  office,  but  rather  in  a  number 
of  changing  jobs.  A  railwayman  will  have 
to  bring  a  wide  vision  and  imagination  to 
realize  the  structure  of  his  business. 

Businesses  belonging  to  the  same  trade  will 
be  found  differing  enormously  in  size  and  in 
structure.  In  farming  at  one  end  of  the 
scale  will  stand  the  peasant  working  a  small 
plot  with  his  own  hands  for  the  subsistence 
of  his  family,  at  the  other,  some  vast  cattle 
ranche  or  some  bonanza  grain-farm  worked 
by  costly  machinery.  In  goldmining  you 
have  the  solitary  placer  or  the  gigantic  Rand 
company.  So  in  almost  every  species  of 
industry,  transport,  manufacture  or  com- 
merce. But  in  the  handling  of  material 
wealth  all  the  factors  which  we  found  in  the 
factory  will  be  present  in  some  sort  or  size  : 
there  must  always  be  some  premises,  tools, 
materials,  stock,  money,  labour  and  manage- 
ment, though  the  last  two  may  be  performed  by 
the  same  persons  in  the  simplest  businesses.1 

1  The  private  factors  of  production  are  conveniently 
grouped  under  four  beads  as  Land  or  Nature,  Labour, 
Ability,  and  Capital.  The  separateness  of  these  four  has 
often  been  challenged  and  is  not  always  capable  of  logical 
defence.  In  particular,  it  has  been  urged  that  Land  might 
be  treated  as  a  form  of  Capital,  for  most  land  that  baa 


22       THE   SCIENCE   OF   WEALTH 

Even  when  applying, .  as  we  must,  our 
wider  conception  of  industry  to  the  produc- 
tion of  non-material  goods,  we  find  the  same 
general  outlines  of  the  business  structure 
applicable.  Turning  to  the  theatre,  the  doc- 
tor's or  lawyer's  "  practice,*'  the  school,  the 
hairdresser's,  or  any  other  organized  arrange- 
ment for  producing  and  selling  "  services,"  we 
shall  find  that  though  the  material  apparatus, 
premises,  tools,  etc.,  are  sometimes  reduced  to 
very  small  dimensions  in  comparison  with  the 
factor  of  personal  skill  and  energy,  they  are 
always  there.  Indeed,  some  of  the  service- 
producing  businesses,  such  as  a  theatre  or  a 

value  is  *'  improved,"  and  the  improvements  incorporated 
with  it  are  clearly  capital.  Moreover,  for  most  purposes 
of  finance  and  book-keeping,  land  values  are  included  in 
capital.  But  iii  our  concrete  account  of  industry  it  is 
important  to  maintain  the  distinction.  For  in  origin  and 
Nature  Land  differs  from  every  sort  of  capital,  and  an 
intelligible  theory  of  payment  for  the  use  of  the  factors 
enforces  the  need  for  the  distinction. 

(  nncrete  capital  will  consist,  then,  of  (1)  buildings  and 
other  fixtures,  (2)  machinery  and  tools,  (3)  materials  and 
stock,  (4)  money.  The  two  former  are  often  called 
"fixed'  capital,  standing  as  they  do  fixed  at  come  point 
in  the  industrial  stream  to  assist  in  driving  raw  materials 
or  goods  towards  their  final  destiny  as  producers'  or  con- 
sumers' commodities.  The  two  latter,  (3)  and  (4),  are 
nsually  called  "circulating"  capital,  for  their  industrial 
work  keeps  them  moving  from  one  place  in  the  industrial 
system  to  another. 

The  separateness  of  the  factors  does  not  imply  a  separ- 
ateness  in  their  ownership.  In  most  of  the  smaller  or 
simpler  types  of  business  the  worker,  or  some  of  the 
workers,  own  also  some  of  the  capital  or  the  land,  and 
give  out  the  ability  required  in  conducting  the  business. 


BUSINESS   AND  TRADE  23 

school,  involve  a  very  elaborate  material 
equipment  which  brings  them  under  the  most 
advanced  form  of  modern  capitalist  enterprise. 

But  in  our  endeavour  to  get  a  firm  con- 
ception of  a  "  business "  as  the  unit  of 
industrial  structure,  we  are  not  yet  out  of 
the  wood.  It  is  clear  that  many  of  the  fac- 
tories, shops,  etc.,  which  we  are  taking  into 
consideration  are  not  separate  independent 
businesses.  They  are  only  separate  establish- 
ments. Though  formerly  it  was  very  unusual 
for  several  factories,  mines,  shops,  to  be  owned 
and  managed  by  the  same  persons,  it  is  quite 
usual  now  in  some  branches  of  industry. 

It  is  the  unity  of  financial  control  that 
gives  unity  to  a  business.  All  the  mills 
belonging  to  a  single  company  must  there- 
fore strictly  be  regarded  as  making  one 
business,  just  as  all  the  retail  stores  of  Lipton's 
or  Wanamaker's  make  one  business.  Nor 
need  a  single  business  in  this  sense  consist 
always  of  a  number  of  mills  or  shops  of  the 
same  sort  in  various  places.  It  may  extend 
its  operations  into  several  different  trades, 
as  where  a  great  departmental  store  has 
attached  to  it  a  farm,  a  furniture  removal 
department  and  a  carpet  factory,  or  where 
a  railway  owns  and  operates  engineering 
works  and  coal  mines.  Nor  is  this  the  only 
way  in  which  the  plain  outline  of  the  single 
business  may  be  blurred.  Many  apparently 


24       THE   SCIENCE  OF   WEALTH 

separately  controlled  establishments  are  in 
their  tinance  or  management,  or  both,  depend- 
ent on  some  larger  and  stronger  firm.  Many 
shops  in  such  trades  as  tobacco,  jewellery, 
shoes,  ironmongery,  if  not  mere  branches, 
are  virtually  agents  selling  on  commission 
certain  classes  of  articles  belonging  to  par- 
ticular manufacturers  or  furnishers.  Other 
workshops,  producing  subsidiary  articles  or 
executing  repairs,  are  often  closely  attached 
to  and  dependent  upon  some  big  manufac- 
turing neighbour.  Many  subtle  forms  exist 
of  such  connections  between  what  at  first 
sight  appear  separate  businesses.  The  ques- 
tion of  financial  and  even  of  managerial  in- 
dependence is  thus  seen  to  be  a  matter  of 
degree  in  many  instances.  But  it  is  not 
necessary  for  our  purpose  to  require  the 
application  of  rigorous  logic  in  such  defini- 
tions. It  will  suffice  to  recognize  that  what 
binds  together  the  different  elements  of  a 
business,  and  gives  it  unity  of  structure  and 
productive  efficiency,  is  what  is  called  the 
management.  If  a  fair  amount  of  discretion 
and  substantial  liberty  in  the  conduct  of 
the  establishment  is  possessed  by  the  manager, 
his  mill  or  mine  or  shop  may  reasonably 
rank  as  a  separate  business  for  the  purposes  of 
a  general  description  of  the  industrial  system, 
although  the  supreme  and  ultimate  decision 
may  be  vested  in  some  body  of  shareholders. 


BUSINESS   AND   TRADE  25 

We  shall,  then,  treat  the  single  complete 
establishment  as  a  separate  business  for  the 
purposes  of  our  survey,  except  when  it  be- 
comes necessary  to  give  emphasis  to  capi- 
talistic combination  and  control.  The  indus- 
trial system  is  thus  first  realized  as  an  elaborate 
arrangement  of  business-cells  grouped  to- 
gether by  certain  resemblances  of  form  and 
purpose  into  Trades.  Businesses  making  or 
handling  the  same  sorts  of  goods  are  con- 
sidered to  belong  to  the  same  Trade,  even 
though  their  methods  of  work  may  differ 
very  widely.  Watchmaking  by  hand  is  a 
very  different  sort  of  work  from  watch- 
making by  machinery,  but  since  the  products 
are  in  both  cases  watches,  they  are  regarded 
as  belonging  to  the  same  trade. 

So  with  other  work  which  is  partly  hand- 
work, partly  factory  work.  Not  only  the 
mode  of  work  but  the  materials  may  differ. 
Houses  may  be  built  of  stone,  wood  or  brick, 
but  they  come  under  the  general  head  of  the 
building  trade.  Generally,  however,  a  marked 
difference  of  material  is  held  to  denote  a 
different  trade.  So  the  iron  bedstead  makers 
are  a  different  trade  from  the  wooden  bed- 
stead makers.  The  test  is  the  Market. 
Businesses  that  compete  effectively  for  the 
sale  of  their  goods  in  the  same  Market  are 
taken  as  belonging  to  the  same  trade.  But 
here,  too,  no  hard  and  fast  line  can  be  drawn. 


26       THE  SCIENCE   OF  WEALTH 

Hand-made  and  machine-made  watches  cer- 
tainly so  compete  :  so  do  wooden  and  wax 
matches  :  these  evidently  belong  to  the  same 
trade.  But  though  wooden  and  steel  furni- 
ture compete,  their  competition  is  less  close 
and  their  markets  not  identical.  Gas  and 
electricity  compete  for  lighting,  and  yet  they 
must  be  classed  as  different  trades.  It  is 
sometimes  convenient  to  speak  of  the  build- 
ing trade,  sometimes  of  the  building  trades. 
The  woollen  or  the  shoe  trades  break  up  into 
special  trades,  often  on  a  local  basis.  Different 
grades  or  qualities  of  the  same  kind  of  goods 
sell  in  a  different  market,  and  are  regarded 
by  the  makers  and  the  buyers  as  different 
trades.  Again,  locality  is  a  basis  for  dis- 
tinguishing trades,  especially  when,  as  is 
common,  it  involves  some  difference  in  work  or 
product.  So  the  Clyde  and  the  Tyne  have  their 
own  ship-building  trades,  the  South  Wales 
coal  trade  stands  apart  from  other  English 
coal-mining,  Leicester  and  Northampton  have 
their  own  shoe  trades.  These  illustrations 
will  suffice  to  show  that  as  much  latitude 
exists  in  the  ordinary  use  of  the  term  Trade 
as  in  that  of  Business.  But  upon  the  whole 
it  is  best  to  consider  the  limits  of  a  Trade  as 
defined  by  those  of  a  Market,  and  to  regard 
businesses,  whose  products  meet  and  compete 
fairly  closely  in  the  same  Market,  as  members 
of  the  same  Trade.  A  Market  is  defined  to 


BUSINESS  AND   TRADE  27 

be  not  any  particular  market  place  in  which 
things  are  bought  and  sold,  but  "  the  whole 
of  any  region  in  which  buyers  and  sellers  are 
in  such  free  intercourse  with  one  another  that 
the  prices  of  the  same  goods  tend  to  equality 
easily  and  quickly." 

Thus  there  is  a  world-market  for  Consols, 
for  gold,  diamonds  and  a  few  important 
durable  goods  and  materials  such  as  wheat 
and  wool  ;  for  most  others  the  national  area 
covers  the  market  ;  and  in  the  case  of  very 
bulky,  perishable  or  immovable  goods,  a  num- 
ber of  small  local  markets  exist.  Of  course 
inside  each  market  there  is  room  for  some 
differences  of  make  and  quality  and  reputation, 
which  affect  the  competition  and  the  price. 

But  the  main  distinctions  here  suggested 
need  not  prevent  us  from  holding  that  busi- 
nesses can  be  grouped  into  separate  trades 
according  as  they  are  engaging  in  supplying 
goods  to  a  common  market.  So  the  operative 
in  a  spinning  mill  at  Bolton,  or  a  shoe  factory 
at  Leicester,  will  soon  extend  his  economic 
vision  from  the  particular  establishment  in 
which  he  works  to  the  groups  of  similar 
establishments  which  constitute,  first  the 
local,  and  then  the  national  cotton  or  shoe 
trade.  The  vaguer  looser  conception  of  an 
international  or  world  trade  may  come  later 
as  a  slight  qualification  of  the  narrower  and 
more  practically  valuable  conception. 


28       THE   SCIENCE  OF  WEALTH 

Of  course  the  unity  and  solidarity  of  his 
trade  will  be  seen  to  be  much  weaker  than 
that  of  his  business.  At  first  it  will  appear 
as  a  number  of  separate  and  competing 
businesses.  But  among  the  local  members 
of  a  trade  some  concerted  action  and  some 
organization  will  usually  be  found.  The 
employers  in  each  trade  are  apt  to  meet  in 
a  society  or  federation  to  gain  information 
and  to  safeguard  and  advance  their  interests 
relating  to  purchase  of  materials  and  labour, 
methods  of  production,  markets,  etc.  The 
workers  in  the  same  trade  also  join  together 
for  various  economic  and  social  purposes. 
A  further  development  of  trade  structure 
consists  in  the  formation  of  a  machinery 
of  agreements,  conferences  and  conciliation 
boards  for  adjusting  the  interests  of  capital 
and  labour  in  relation  to  wages  and  other 
conditions  of  employment. 

The  worker  will  thus  come  to  set  a  definite 
meaning  upon  his  Trade.  In  getting  this 
knowledge  he  will  gather  a  notion  of  how  this 
trade  stands  in  relation  to  some  others.  He 
will  perceive  the  very  close  dependence  of 
his  trade  upon  other  trades  which  supply 
the  materials  on  which  he  works  and  upon 
the  trade  or  market  which  buys  the  product 
of  his  trade.  If  he  is  a  shoe  operative,  he 
will  find  his  trade  especially  affected  by  any- 
thing that  happens  to  the  tanning  trade 


BUSINESS  AND  TRADE  29 

which  furnishes  the  leather,  or  to  the  mer- 
chants or  retail  shops  which  take  from  the 
manufacturer  the  shoes.  If  he  is  a  woollen 
weaver,  he  will  realize  the  close  dependency 
of  his  trade  upon  the  conditions  of  the  raw 
wool  trade  on  the  one  hand,  the  clothing 
trade  upon  the  other.  For  he  will  see  impor- 
tant forces  that  affect  his  work  and  wages 
issuing  from  either  of  these  directions.  If  he 
carries  his  inquiry  and  reflection  further,  he 
will  make  the  important  discovery  that  the 
trade  in  which  he  works  is  but  a  link  in  a 
chain  of  industries  engaged  in  converting 
raw  materials  into  finished  goods  and  putting 
them  into  the  hands  of  consumers. 

If  he  is  a  shoe  operative  he  will  see  his 
chain  running  thus — 

Farmer Tanner Shoemaker Shoe  merchant Shoe  shops. 

If  he  is  an  engineer  they  will  run  thus — 

Mining Smelting Steel  works Machine  shop*. 

But  every  trade  will  be  found  to  have 
some  other  trades  linked  directly  with  it  and 
working  towards  the  production  and  supply 
of  the  same  articles.  There  will  be  some 
branch  of  farming  or  mining  engaged  in 
extracting  raw  materials  from  Nature.  Then 
will  follow  one  or  more  manufacturing  pro- 
cesses, and  after  that  some  wholesale  and 
retail  distributive  trade. 


CHAPTER  III 

THE   INDUSTRIAL  SYSTEM 

OUR  shoe  operative,  weaver  or  other  special- 
ized worker,  now  looking  out  from  his  trade, 
will  realize  it  as  a  member  of  a  series,  all 
bound  together  by  common  interest  in  for- 
warding the  production  of  some  particular 
goods.  Though  he  may  know  little  about 
other  trades,  he  will  rightly  conclude  that  they, 
too,  similarly  run  in  series  of  productive  and 
distributive  processes.  As  a  consumer  buy- 
ing various  sorts  of  food,  clothing  and  other 
commodities,  he  will  recognize  that  he  is 
tapping  one  end  of  a  number  of  similarly 
constructed  industrial  chains.  So  industry 
will  begin  to  widen  out  to  his  vision  as  a 
number  of  series  or  streams  of  processes, 
each  series  or  stream  engaged  in  the  separate 
task  of  forwarding  some  raw  materials  on 
the  road  to  consumers'  goods.  He  will  see, 
not  only  the  boots  he  wears,  but  the  loaves, 
shirts,  tables,  books,  tobacco,  and  other 
things  he  buys,  as  the  ends  and  objects  of 
a  special  series  of  trades.  But  he  will  soon 

30 


THE  INDUSTRIAL   SYSTEM        31 

observe  that  the  separateness  of  the  goods, 
loaves,  boots,  shirts,  etc.,  gives  an  exagger- 
ated notion  of  the  separateness  of  the  lines 
of  trades  through  which  they  pass  in  the 
making.  For  he  will  recognize  that  there  is 
no  complete  series  of  trades  entirely  devoted 
to  making,  moving  and  selling  boots.  The 
farmers  who  supply  hides  to  the  tanners, 
supply  also  carcases  to  butchers,  grain  to 
millers,  and  enter  into  other  series  of  pro- 
ducts. The  tanner,  too,  furnishes  leather 
to  other  manufacturers  besides  shoemakers. 
Many  retail  shops  sell  other  articles  besides 
shoes.  The  same  will  turn  out  to  be  true 
for  any  other  series  of  trades.  The  streams 
of  production  merge  or  overlap  at  certain 
points.  Certain  early  extractive  and  manu- 
facturing processes  will  be  found  to  figure 
in  a  great  many  of  the  series.  Farmers, 
miners  and  others  who  get  raw  materials 
from  Nature,  must  perform  the  opening 
process  in  all  the  great  productive  series. 
When  their  extractive  work  is  done,  the 
great  variety  of  materials  it  affords  is  sorted 
and  is  put  through  a  number  of  different 
processes.  The  later  manufacturing  processes 
are  more  numerous  and  more  specialized, 
while  the  work  of  distributing  and  selling 
goods  often  brings  together  in  the  same  trade 
or  business  a  quantity  of  goods  which  in 
their  manufacture  belonged  to  different  trades. 


82         THE   SCIENCE   OF   WEALTH 

If,  then,  we  take  the  symbol  of  a  stream, 
and  speak  of  currents  of  industry  carrying 
raw  materials  past  the  different  stages  of 
production,  until  they  flow  over  the  retail 
counter  into  the  hands  of  consumers,  we  shall 
find  the  stream  issuing  from  a  few  sources, 
dividing  into  an  increasing  number  of  separ- 
ate currents  as  it  flows  on  in  manufacture, 
and  again  gathering  into  comparatively  few 
channels  as  it  passes  along  the  mercantile 
stages  towards  the  consumer. 

But  the  actual  structure  of  industry  is,  of 
course,  much  more  complicated  than  this 
picture  would  imply.  Some  of  this  com- 
plexity will  appear  comparatively  early  to 
our  intelligent  workman  taking  observations 
from  his  place  in  a  factory,  a  mine,  an  office. 
He  will  recognize  that  all  trades  are  not  en- 
gaged directly  in  the  work  of  pushing  raw 
materials  through  the  main  stream  of  in- 
dustry towards  consumers'  goods.  The  shoe 
operative  will  be  aware  that  there  are  one 
or  two  trades  we  have  not  mentioned  which 
are  nearly  as  important  in  their  bearing  on 
shoe  manufacture  as  the  tanning  trade  itself, 
viz.  the  trades  which  supply  the  machinery 
and  power  used  in  his  factory.  This  machin- 
ery and  power  are  of  course  themselves 
the  final  products  of  a  series  of  productive 
processes,  converting  raw  materials  into  these 
forms  of  capital.  They  do  not  figure  at  the 


THE   INDUSTRIAL   SYSTEM        33 

end  of  our  industrial  system  as  "  consumers' 
goods."  They  find  their  goal  in  becoming 
"  capital,"  and  are  used  up,  not  as  commodi- 
ties, but  as  plant  and  other  aids  to  production. 
In  examining  the  structure  of  a  business  we 
recognized  that  premises  and  machinery  as 
well  as  materials  were  needed.  It  is  only  the 
materials  which  are  the  objects  of  the  process 
of  manufacture  and  which  flow  down  the 
stream  towards  consumers'  goods.  The  build- 
ings, machinery  and  other  plant  are  used  as 
means  to  this  end.  But  they  have  to  be 
produced,  and  their  forms  are  gradually 
worn  out  in  the  work  of  assisting  to  make 
hides  into  leather,  or  leather  into  boots,  or 
in  some  other  useful  work. 

The  shoe  operative,  then,  will  see  that  his 
main  current  of  trades,  converting  cattle 
into  shoes,  must  be  reinforced  by  various 
tributary  trades  engaged  in  supplying  the 
tools,  power,  buildings,  etc.,  required  at  each 
stage  in  production. 

Taking  the  single  factor  of  machinery,  he 
will  correct  his  picture  as  on  p.  34. 

But  there  are  other  trades  which  he  will 
see  assisting  to  produce  and  maintain  the 
buildings  and  other  appliances  of  the  factory, 
the  light,  heat  and  power  required  :  these, 
too,  he  must  fit  into  his  fuller  picture.  Since 
it  is  evident  that  the  farmer,  tanner,  mer- 
chants and  retail  shopkeepers,  who  stand  in 

B 


34       THE   SCIENCE   OF   WEALTH 

the  direct  stream  of  industry,  likewise  use 
plant,  machines  and  other  products  to  assist 
them  in  their  work,  it  follows  that  at  each 
process  the  main  stream  must  be  fed  by 
tributary  streams  which  flow,  not  to  the 
ultimate  consumer,  but  to  some  single  stage 
in  production,  supplying  new  stores  of  auxili- 
ary goods  to  producers. 

Of  course,  if  one  likes,  it  is  possible  to  regard 


Steel  making. 


Shoemafang.  Shoe  shops. 


the  machinery,  buildings  and  other  plant  as 
being  gradually  worked  up  into  the  goods 
they  assist  to  produce,  and  so  flowing  down 
the  main  stream  to  consumption.  But  this 
view  need  not  concern  us  here. 

Now  these  tributary  trades,  supplying  the 
"  fixed  capital  "  to  the  main  stream,  are  often 
larger  and  more  important  than  the  special 
trades  they  feed.  For  some  of  them  supply 
with  the  same  sorts  of  fixed  capital  not  one 


THE   INDUSTRIAL   SYSTEM        33 

but  many  trades  in  the  main  stream  of  in- 
dustry. The  iron,  steel,  engineering  and 
machine-making  trades  are  important  tribu- 
taries at  every  point  of  the  factory  system. 
So  are  the  building  trades.  The  mining, 
the  principal  metal  and  building  trades  are 
chief  supports  of  the  permanent  fabric  of  so 
many  special  trades,  that  they  are  often 
spoken  of  as  "  fundamental "  industries. 
When  anything  serious  happens  to  any  of 
them,  the  effects  are  soon  seen  in  every  part 
of  the  industrial  system. 

But  there  are  other  bonds  of  common 
interest  between  the  trades  in  the  main 
stream  of  production  besides  these  "  funda- 
mental "  industries. 

The  same  sort  of  raw  material  may  be 
utilized  either  as  a  chief  ingredient  or  as  a 
subsidiary  in  many  main  branches  of  pro- 
duction. The  chief  grains,  timber,  textile 
fabrics,  iron,  coal,  stone,  clay,  etc.,  form  raw 
material  in  the  making  of  many  different 
commodities,  and  the  different  trades  using 
any  one  of  them  are  related  by  powerful 
bonds  of  sympathy  and  antipathy.  Such 
is,  for  example,  the  relation  of  shoe-making 
to  saddlery  and  upholstery  (through  leather), 
of  jam-making  to  biscuits  or  to  aerated 
waters  (through  sugar).  Where  such  com- 
munity in  use  of  material  exists,  it  breeds 
a  sympathy  between  trades.  For  anything 


86       THE   SCIENCE   OF   WEALTH 

which  improves  or  impairs  the  supply  of  their 
common  material  causes  gain  or  injury  to 
all.  So  far  there  is  sympathy.  But  any- 
thing which  gives  one  trade  a  better  pull 
than  others  upon  the  supply  injures  these 
others.  So  far  there  is  antagonism.  Oil 
and  rubber  are  instances  of  the  recent  growth 
of  two  ingredients  of  vital  importance  to  many 
trades. 

Some  trades  are  in  close  enduring  sym- 
pathy, because  they  supply  important  com- 
plementary ingredients  to  one  or  several 
important  industries.  The  iron  and  coal 
trades  furnish  the  most  obvious  example. 
But  this  sympathy  is  very  strong  in  many 
special  trades,  as  between  the  fruit-growing 
and  sugar-refining  trades,  or  wine-growing 
and  bottle-making,  or  between  the  various 
trades  furnishing  materials  to  the  building 
trades. 

On  the  other  hand,  a  keen  antagonism  is 
set  up  between  certain  trades  by  reason  of 
the  possibility  of  substitutes.  When  differ- 
ent materials  can  be  used  to  supply  the  same 
wants  this  hostility  exists.  Wood  and  iron 
in  many  sorts  of  furniture  or  building ; 
cotton,  wool,  linen  in  articles  of  clothing  ; 
tea,  coffee,  cocoa  among  drinks,  will  serve 
as  instances.  So  electricity,  gas,  oil  and 
steam  compete  against  one  another  as  sources 
of  industrial,  locomotive  or  domestic  energy. 


THE   INDUSTRIAL   SYSTEM        37 

These  trades,  and  others  subsidiary  to  them, 
are  thus  brought  into  conflict,  and  anything 
which  benefits  one  is  apt  to  injure  the  others. 
The  substitution  may  sometimes  be  in 
materials,  sometimes  in  process,  sometimes 
in  final  commodities ;  but  wherever  it  operates 
it  breeds  opposition. 

Among  what  first  appear  as  separate 
trades  engaged  in  converting  raw  materials 
into  commodities,  we  perceive,  then,  many 
connecting  bonds  of  union  and  opposition. 
The  series  of  industrial  processes  cross,  fuse 
and  separate  at  various  points :  no  series 
runs  a  completely  isolated  course. 

But  there  are  two  sorts  of  industry  which 
deserve  particular  attention  as  unifying  in- 
fluences, viz.  transport  and  finance.  They 
are  not  fundamental  like  mining  and  agri- 
culture, but  pervasive  and  connective.  Wher- 
ever any  business  is  carried  on,  a  constant 
conveyance  of  materials  to  the  business,  and 
of  finished  goods  from  the  business,  is  in- 
volved :  every  act  of  buying  and  selling 
involves  some  act  of  conveyance.  The  group 
of  trades  concerned  with  such  conveyance 
must,  therefore,  occupy  a  place  of  peculiar 
prominence  in  the  industrial  system.  Taken 
as  a  whole,  they  form  an  apparatus  corre- 
sponding to  the  vasomotor  system  in  an 
animal  organism.  In  one  sense,  indeed,  all 
physical  work  is  movement  of  matter,  and 


38       THE   SCIENCE  OF  WEALTH 

much  of  it  forms  part  and  parcel  of  every 
business  operation.  But  in  modern  indus- 
trial societies  transport  in  its  special  sense, 
the  conveyance  of  persons,  goods  and  in- 
telligence from  one  place  to  another,  becomes 
a  highly  specialized  and  important  work. 
The  railway  and  the  steamship  find  a  place 
in  almost  every  series  of  productive  pro- 
cesses. They  furnish  the  physical  links  that 
give  efficiency  and  continuity  to  the  whole 
movement.  Any  stoppage  of  a  great  railway 
or  a  great  shipping  service  paralyses  a  whole 
industrial  area  :  even  the  cutting  of  telegraph- 
wires  confuses  and  retards  the  whole  working 
of  industry.  As  industry  becomes  more 
complex,  materials  and  labour  are  drawn 
from  more  distant  and  more  numerous  places 
to  take  part  in  more  delicate  and  complex 
processes  of  co-operation,  and  the  commercial 
working  of  the  system  depends  more  and 
more  upon  rapid  and  reliable  information 
about  their  movements.  For  this  reason 
transport  is  found  in  every  civilized  country 
to  play  a  larger  and  more  imposing  part  in 
industry,  absorbing  an  increasing  proportion 
of  capital  and  labour,  and  presenting  the  most 
critical  problems  of  control.  When,  as  is 
the  case  in  many  large  countries,  the  railroad 
is  the  sole  effective  means  of  transport,  it 
may  wield  a  power  over  the  life,  prosperity 
and  industry  of  the  population  which  is 


THE   INDUSTRIAL   SYSTEM         39 

despotic  unless  the  government  intervenes. 
Every  improvement  of  transport  facilitates, 
every  breakdown  of  transport  damages,  simul- 
taneously, all  the  industries  concerned  with 
the  production  of  material  wealth. 

Equally  pervasive  and  more  authorita- 
tive in  its  general  control  over  all  modern 
industry  is  finance.  Under  that  term  we 
include  all  business  connected  with  the 
production,  protection  and  conveyance  of 
money,  or  purchasing  power,  and  with  the 
creation  of  and  dealing  in  stocks,  shares  and 
other  negotiable  securities.  We  saw  that 
our  science  is  concerned  entirely  with  things 
that  have  a  marketable  value  and  with 
processes  each  act  of  which  involves  a  pur- 
chase. So  it  is  obvious  that  the  industries 
concerned  with  the  production  and  applica- 
tion of  purchasing  power  are  in  their  influence 
as  critical  and  as  pervasive  as  the  work  of 
physical  transport.  The  familiar  saying 
"  Money  makes  the  world  go  round  "  is  a 
popular  testimony  to  the  importance  attach- 
ing to  the  sort  of  business  enterprises  which 
produce  and  regulate  the  supply  of  financial 
power.  The  forces  issuing  from  finance  are 
operative  everywhere  throughout  the  in- 
dustrial order.  A  great  banking  crisis  paralyses 
all  industrial  activities  as  surely  and  even 
more  completely  than  a  breakdown  in  the 
railway  system. 


40       THE   SCIENCE  OF   WEALTH 

Thus,  though  we  recognize  a  certain  sort 
of  independence  and  completeness  in  a 
business  or  in  a  trade,  we  also  recognize  a 
number  of  ways  in  which  businesses  and 
trades  are  related  to  and  dependent  on  one 
another.  The  common  use  of  some  particular 
material  or  source  of  power,  the  substitution 
of  one  material  for  another,  afford  special 
bonds  of  amity  or  enmity  between  certain 
trades.  A  few  farming,  extractive  and  manu- 
facturing trades  stand  as  common  starting- 
points  for  a  great  variety  of  later  processes. 
The  industries  of  transport  and  of  finance 
present  a  general  connective  apparatus. 

But,  finally,  it  remains  to  be  observed  that 
there  exists  a  more  general  sympathy  and 
opposition  between  all  trades,  due  to  the  fact 
that  they  draw  the  very  breath  of  life  from 
common  sources.  Fresh  streams  of  capital 
and  labour  continually  enter  industry  to 
maintain,  invigorate  and  enlarge  its  structure 
and  its  vital  energy.  In  its  first  emergence, 
as  productive  energy  available  for  use,  this 
fresh  supply  of  capital  and  of  labour  power, 
the  new  crop  of  young  labourers  and  of  new 
savings,  is,  in  a  "  free  "  country,  at  liberty 
to  apply  itself  to  any  special  sort  of  industry, 
and  all  trades  must  draw  for  their  needs 
upon  this  common  and  constant  supply. 
They  have,  therefore,  a  supreme  common 
interest  in  the  size,  quality  and  reliability 


THE   INDUSTRIAL  SYSTEM         41 

of  this  supply,  and  in  the  terms  upon  which 
it  is  procurable.  So  every  cause  affecting 
the  volume,  the  fluidity  and  the  efficiency 
of  the  new  capital  and  labour  in  a  community, 
will  affect  all  the  several  trades.  As  we 
examine  the  working  of  the  industrial  system 
in  more  detail,  we  shall  see  that  many  barriers 
block  or  impede  the  free  flow  alike  of  labour 
and  of  capital.  But  so  far  as  labour  and 
capital  have  liberty  to  enter  different  trades, 
or  to  transfer  themselves  from  one  employ- 
ment to  another,  they  must  be  regarded  as 
forming  common  funds  of  industrial  energy 
pulsing  through  the  whole  framework  of 
industry,  as  the  blood  courses  through  the 
various  organs  and  cells  of  the  body,  giving 
organic  unity  to  the  entire  system. 


B  2 


CHAPTER   IV 

HOW  THE  INDUSTRIAL  SYSTEM  WORKS 

PART   I 

WE  have  now  obtained  a  comprehensive 
picture  of  an  industrial  system  in  which 
many  clusters  of  businesses  are  grouped  into 
trades,  while  these  trades  are  arranged  in 
order  by  series  to  carry  on  the  work  of  con- 
verting the  raw  materials  and  forces  of  Nature 
into  commodities  and  services  for  the  use  of 
man.  The  diagram  on  p.  43  presents  the 
main  features  of  this  picture. 

The  mechanism  of  industry,  continually 
taking  in  fresh  supplies  of  materials  from 
Nature  by  means  of  the  extractive  processes, 
carries  them  through  a  series  of  manufactur- 
ing, transport  and  commercial  processes  which 
changes  their  shape,  composition  or  place, 
until  they  finally  are  tumbled  out  of  the  retail 
"  hopper  "  as  consumers'  goods. 

At  each  stage  in  the  process  stand  supplies 
of  the  factors  of  production,  land,  labour, 
fixed  capital,  ability,  engaged  in  this  regular 
work  of  forwarding  production,  and  all  these 
factors,  as  they  are  used  up  or  worn  out  in 

42 


HOW  THE   SYSTEM  WORKS       43 

their  productive  work,  are  replaced  by  new 
factors  themselves  composed  of  materials 
drawn  from  Nature  and  prepared  by  a  series 
of  productive  processes  for  the  place  they  are 
to  occupy.  So  the  industrial  system  has  its 
many  suckers  in  Nature,  everywhere  drawing 
out  materials  and  forces  to  be  worked  up, 
partly  into  consumers'  goods,  partly  into  new 
instruments  of  production. 


However  intricate  the  system  may  be,  there 
is  nothing  mysterious  about  its  actual  working. 
Every  one  knows,  or  can  find  out,  how  the 
chief  kinds  of  materials,  such  as  grains,  fruits, 
animals,  timber,  textiles,  coal,  clay,  metals, 
are  worked  up  by  different  trades  into  the 
immense  variety  of  finished  articles  which  we 
use.  The  regular  course  of  their  productive 
career  sometimes  calls  forth  the  image  of  a 
river,  sometimes  of  a  machine,  sometimes  of 
an  organism.  The  organic  metaphor  is  the 


44       THE   SCIENCE   OF   WEALTH 

most  useful,  suggesting  the  likeness  of  industry 
to  the  processes  of  taking  in  food,  digesting 
and  assimilating  it,  converting  it  into  working 
energy  and  new  tissue,  and  excreting  the 
waste.  But  none  of  these  images  is  quite 
correct.  All  suggest  more  regularity  and  more 
smoothness  of  action  than  actually  exist. 
None  of  them  takes  proper  account  of  one 
essential  fact,  viz.  that  each  productive  act 
done  to  the  material  in  any  process  requires 
the  co-operation  of  a  number  of  conscious 
agents,  the  owners  of  the  different  factors  of 
production  that  are  used.  The  bodily  and 
mental  energy  of  countless  little  business 
groups  in  a  workshop  or  factory,  a  mine,  a 
railway  station,  a  warehouse,  must  be  got 
into  play  over  and  over  again  to  perform  the 
innumerable  acts  required  to  keep  materials 
moving  down  the  industrial  stream.  These 
acts  are  separate  productive  acts  and  they 
require  the  application  of  separate  stimuli. 
How  is  the  constant  stimulation  applied  ? 
Here  again  there  is  no  mystery.  Through 
the  industrial  system  there  is  a  constant  flow 
of  money  which  quite  evidently  performs  the 
work  of  calling  forth  the  application  of  in- 
dustrial energy  from  the  owners  of  the  different 
factors  of  production.  This  flow  of  money 
moves  in  the  reverse  direction  to  the  flow  of 
materials  and  goods.  The  latter  flow  from 
the  extractive  processes  through  the  manu- 


HOW   THE   SYSTEM   WORKS       45 

facturing  and  distributive  processes  until  they 
pass  over  the  retail  counter.  The  former  enter 
the  system  chiefly  at  the  retail  counter  and 
move  up  through  the  distributive,  manufactur- 
ing and  extractive  processes  in  due  course. 

Take  as  an  example  the  series  of  trades 
concerned  with  producing  boots. 

The  regular  working  of  the  boot  trade  re- 
quires that  at  each  stage  there  shall  be  disposed 
a  proper  amount  of  factories  and  other  fixtures, 
machinery  and  tools,  employers  and  work- 
men, engaged  in  converting  hides  into  boots 
and  placing  the  boots  in  the  possession  of 
wearers.  All  this  apparatus  is  kept  in  being 
and  in  operation  by  a  continual  succession 
of  payments  of  money  made  to  the  workers, 
employers,  capitalists,  landowners  at  the 
several  stages  of  production.  These  pay- 
ments for  the  factors  of  production  constitute 
wages,  profits,  interest,  rent.  Whence  do 
they  come  and  how  are  they  paid  ?  A  practical 
answer  to  these  questions  is  given  by  posting 
oneself  at  the  counter  of  a  ready  money  shoe 
store  doing  a  regular  business  with  a  turn-over 
of,  say,  £100  per  week.  Customers  buy  and 
take  away  shoes,  paying  for  them  in  cash. 
What  does  the  shopkeeper  do  with  the  £100  he 
thus  receives  ?  Out  of  it  he  pays  the  weekly 
wages  of  his  employees,  sets  aside  something 
towards  the  quarter's  rent  and  towards  the 
interest  on  his  borrowed  capital,  replenishes 


46       THE  SCIENCE  OF   WEALTH 

his  stock,  and  keeps  what  remains  as  wages 
of  management  or  profits.  All  these  pay- 
ments are  necessary  stimuli  to  the  retail 
process  in  the  shoe  series.  They  induce  the 
owner  of  some  factor  of  production  to  apply 
it  in  a  new  productive  act  which  helps  to 
maintain  the  supply  of  shoes  intact  in  the 
retail  store.  The  £100  we  see  is  partly  used 
to  pay  wages,  interest,  profit,  rent  in  the  retail 
business.  These  costs  of  retailing  do  not, 
however,  take  more  than,  say,  £20  out  of  his 
£100.  The  £80  is  handed  on  to  the  wholesale 
merchant,  in  an  "  order "  for  more  shoes 
to  replace  in  the  retail  store  those  which 
have  been  sold.  The  merchant  who  receives 
this  £80,  in  his  turn,  applies  part  of  it  to 
pay  the  wages,  rent,  interest  and  profits  in 
his  office  and  warehouse,  the  rest,  say  £60, 
he  uses  to  buy  shoes  from  the  manufacturer 
to  replace  those  he  has  sold  to  the  retailer. 
Similarly  the  manufacturer  pays  out  of  his 
£60  his  current  costs  of  production,  say  £30 
in  wages,  rent,  interest  and  profit,  laying  out 
the  other  £30  in  a  new  purchase  of  hides  and 
other  materials.  The  tanner  receiving  £30 
from  the  manufacturer  will  make  a  similar 
apportionment  of  the  money  at  his  stage  of 
production,  paying  the  farmer  £15  for  some 
fresh  hides,  which  sum  the  farmer  in  his  turn 
will  use  up  in  the  payments  he  is  called  upon 
to  make  for  raising  cattle. 


HOW  THE   SYSTEM  WORKS        47 
Here  is  the  process  we  describe — 


Farm         Tannery      SlweFacroiy    ShoeMarM    ShoeSCore 

It  matters  not  whether  the  proportion  given 
here  for  the  distribution  of  the  £100  spent  on 
shoes  corresponds  to  any  known  condition 
of  the  trades.  What  is  certain  is  that  the 
£100  paid  over  the  retail  counter  circulates 
through  the  connected  series  of  trades  in  the 
way  described,  that  each  payment  out  of  it 
directly  evokes  a  new  productive  activity, 
and  that  this  is  the  means  by  which  the 
industrial  system  is  kept  working.  The 
prices  paid  in  demand  for  finished  goods  are 
broken  up  and  circulate  through  the  productive 
processes,  so  as  to  maintain  at  each  stage  the 
activities  required  to  keep  up  the  supply. 

If  for  boots  we  substitute  loaves,  shirts, 
books,  bicycles,  or  any  other  article,  the  same 
analysis  applies.  The  retail  prices  paid  for 
the  finished  articles  break  up  into  a  number 
of  payments  made  at  the  different  stages  of 
production. 

It  will  no  doubt  occur  to  some  that  trade, 
even  under  ordinary  conditions,  does  not  work 
in  quite  this  simple,  regular  fashion.  The 
credit  system,  for  instance,  does  not  always 
oblige  a  shopkeeper  or  a  merchant  to  wait  for 


48       THE   SCIENCE  OF  WEALTH 

cash  from  the  customer  in  order  to  pay  his 
way.  The  manufacturer,  again,  does  not 
always  wait  for  the  merchant  to  order  goods 
and  to  accompany  the  order  by  payment.  He 
often  produces  in  advance,  and  himself  tries 
to  stimulate  demand. 

But  these  niceties  of  actual  commerce  may 
be  ignored  in  a  presentation  of  the  fundamental 
facts.  It  is  evidently  correct  to  say  that  in  the 
regular  working  of  the  industrial  system  money 
enters  as  the  universal  stimulus  through  de- 
mand for  commodities.  Such  demand  visibly 
acts  as  the  "  demand  "  for  labour,  capital, 
land,  ability,  in  each  of  the  several  processes. 

The  simplicity  of  our  illustration  requires, 
however,  one  qualification.  Our  picture  of 
the  industrial  system  showed  that  at  each 
stage  a  tributary  set  of  processes  was  engaged 
in  furnishing  the  buildings,  machinery  and 
other  fixed  capital.  It  is  evident  that  the 
"  wear  and  tear  "  of  this  capital  must  also  be 
provided  for  out  of  the  only  course  available, 
viz.  the  retail  payments  for  commodities. 
When,  therefore,  we  assign  at  the  retail  stage 
£20,  out  of  the  £100,  as  costs,  a  part  of  which 
is  to  be  paid  to  Capital,  that  payment  must 
include  depreciation  or  provision  against 
wear  and  tear.  Similarly  with  the  payment 
made  for  capital  in  the  warehouse,  the  factory, 
the  tannery,  the  farm.  Whenever  fixed  capital 
is  used,  some  addition  must  be  made  to  the 


HOW  THE  SYSTEM  WORKS       49 

payment  so  as  to  stimulate  those  tributary 
trades  required  to  reproduce  the  buildings, 
machinery  and  other  plant  which  are  continu- 
ally being  worn  out. 

If,  then,  we  apply  to  the  economic  system 
as  a  whole  the  working  model  furnished  by 
the  series  of  trades  engaged  in  making  and 
selling  shoes,  we  seem  to  have  a  clear  picture 
of  it  both  as  an  industrial  and  a  financial 
system.  The  constant  regular  flow  of  all 
sorts  of  raw  materials  through  the  various 
extractive,  manufacturing,  distributive  pro- 
cesses, each  furnished  with  a  proper  quantity 
of  the  different  factors  of  production  organized 
in  businesses  and  trades,  gives  the  industrial 
aspect.  Its  financial  counterpart  is  a  cor- 
responding flow  in  the  reverse  direction  of 
money,  put  in  at  the  retail  end,  and  working 
its  way  up  the  stream,  stimulating,  as  it 
passes,  each  factor  of  industry  so  as  to  evoke 
a  fresh  activity. 

PART   II 

This  picture  of  the  circulation  of  goods  and 
money  appears  to  give  equal  prominence  to 
the  two.  To  do  this,  however,  would  be 
unduly  to  exalt  the  part  played  by  money  in 
the  industrial  system.  Though  to  the  business 
man  considering  his  investments  and  his  profits, 
money  often  figures  as  the  end  and  object  of 
his  activity,  this  is  not  actually  the  case. 


50       THE   SCIENCE   OF   WEALTH 

Important  as  money  is,  it  is  a  means  and  not 
an  end.  A  means  to  what  ?  A  means  to  the 
distribution  of  industrial  energy  on  the  one 
hand,  and  of  industrial  products  on  the  other. 
As  it  circulates  about  the  system,  it  is  seen 
bringing  labour,  land,  capital,  ability,  in 
different  sorts  and  sizes,  to  the  places  where 
they  are  wanted,  and  apportioning  the  product 
among  the  owners  of  these  factors.  Since 
production  is  admittedly  a  means  to  con- 
sumption, the  distribution  of  the  industrial 
product  must  be  accounted  the  primary  object 
for  which  money  is  used.  We  have  seen  how 
money  orders  and  stimulates  industry  in  its 
various  stages.  It  remains  to  recognize  that 
this  stimulation  really  takes  shape  through 
a  distribution  of  the  product.  Money  itself 
has  no  power  to  stimulate  industry.  Though 
habit  makes  money  seem  an  end,  a  thing 
desirable  on  its  own  account,  this  of  course 
is  an  illusion.  The  labourer  wants  not  money 
but  money's  worth.  So  does  the  capitalist 
in  seeking  the  payment  of  his  interest,  and  the 
landlord  in  the  payment  of  his  rent.  The 
actual  work,  then,  upon  which  Money  is 
engaged,  as  the  retail  payments  dissolve  and 
circulate  through  the  system,  is  the  distribu- 
tion of  the  varied  products  of  industry. 

In  the  particular  series  of  processes  which 
end  in  the  sale  of  boots,  the  sole  product  con- 
sists of  boots,  and  if  a  primitive  distribution 


HOW  THE   SYSTEM  WORKS       51 

prevailed,  the  wages,  rent,  interest  and  profits 
along  the  whole  line  would  be  paid  in  boots, 
which  each  recipient  would  have  to  wear,  or 
to  "  swop  "  against  bread,  shirts,  or  some 
other  goods  paid  in  similar  fashion  as  wages, 
rent,  etc.,  in  some  other  line  of  production. 
Then,  at  the  close  of  an  intolerable  series  of 
acts  of  barter,  the  shoe  operative  might  get 
as  the  product  of  his  labour,  not  shoes,  but 
various  other  commodities,  which  are  what 
he  wants.  Money  was  invented  to  save  the 
risks  and  trouble  of  such  barter,  and  to  enable 
every  special  sort  of  worker  to  be  paid  in 
general  wealth.  For  the  money- wage  he 
receives  is  nothing  else  than  a  general  order 
upon  the  product,  not  of  this  or  that  set  of 
trades,  but  of  the  whole  industrial  system. 
The  tendency  of  civilization  is  to  confine  each 
worker  ever  more  closely  to  a  single  narrow 
sort  of  work,  a  bit  of  a  single  process  in  one 
trade  :  the  money -wage  he  gets  reverses  the 
process,  putting  him  in  possession  of  a  bit  of 
the  product  of  every  other  trade.  So,  though 
he  is  only  a  laster  or  a  finisher  in  his  own  trade, 
he  is  likewise  miller,  baker,  spinner,  weaver,  car- 
penter, etc.,  through  his  capacity  to  get  a  share 
of  the  product  of  each  of  these  other  trades. 

As  a  producer  he  is  specialized,  as  a  consumer 
he  is  generalized.  It  will  be  well  to  realize 
clearly  how  this  transformation  of  special 
worker  into  general  consumer  is  brought 


52       THE   SCIENCE  OF   WEALTH 

about.  How  is  it  that  a  worker  in  a  shoe 
factory,,  whose  work  may  consist  in  nothing 
else  than  stamping  leather,  can  change  his 
services  into  loaves,  shirts,  chairs,  tobacco, 
etc.  ?  His  particular  work  is  worthless  taken 
by  itself;  stamped  leather  is  of  no  use  to  any 
one.  Only  when  the  stamped  leather  has 
passed  through  various  other  processes,  and, 
being  made  up  into  shoes,  has  been  sold  to  a 
customer,  is  the  utility  of  his  work  realized. 
Then  out  of  the  money-payment,  which 
measures  the  social  utility  of  the  whole  set  of 
shoe-making  processes,  he  gets  his  share. 
Clicking,  lasting  or  finishing  has  thus  been 
converted  into  money  by  means  of  the  sale 
of  shoes.  The  clicker,  laster  or  finisher,  can 
now  take  pieces  of  this  money,  and  going 
himself  to  one  retail  shop  after  another,  can 
convert  it  into  the  loaves,  shirts,  tobacco,  etc., 
that  he  wants.  As  he  buys  loaves  at  the 
baker's  he  sets  a  money  stimulus  at  work  along 
the  line  of  processes  which  go  to  make  bread  : 
the  baker  and  his  assistants,  the  miller  and  his 
men,  the  farmer  and  his  labourers,  get  each 
a  bit  of  the  money  our  shoe  operative  has  paid 
for  loaves,  and  each  of  them  with  it  buys  at 
the  retail  shops  the  various  articles  he  needs. 
Among  these  articles  are  shoes.  So,  some  of 
the  very  money  which,  paid  over  the  shoe- 
counter,  passes  to  the  shoe  operative  in  wages, 
is  the  money  with  which  the  shoe  operative 


HOW  THE   SYSTEM  WORKS       53 

himself  bought  loaves.  The  shoe  operative 
needs  bread,  the  baker  and  miller  need  shoes. 
We  see  how  money,  the  price  of  shop-goods, 
enables  each  to  supply  his  needs  by  exchange 
with  the  other. 

Let  us,  however,  set  out  this  process  of 
exchange  a  little  more  fully.  Take  the  repre- 
sentative needs  of  man,  say,  loaves,  boots, 
shirts,  coats,  chairs,  meat,  sugar,  milk,  books, 
crockery.  Apply  to  each  of  these  our  image 
of  a  stream  of  production,  each  product  having 
a  separate  series  of  four  processes  engaged  in 
producing  it.  Suppose  these  to  be  the  only 
economic  wants,  and  that  each  man  in  the 
community  wants  the  same  amount  of  each. 
For  convenience,  substitute  A,  B,  C,  D,  etc., 
for  these  ten  products.  The  producers  of  A 
will  then  spend  one-tenth  of  their  pay  in 
buying  A,  the  commodities  which  they  help 
to  produce,  one-tenth  in  buying  B  and  one- 
tenth  in  buying  C,  and  so  with  each  of  the 
other  seven  products.  Similarly,  the  pro- 
ducers of  B,  C,  or  one  of  the  other  sorts  of 
goods,  will  spend  his  pay,  each  using  one- 
tenth  to  buy  the  finished  products  of  the  series 
of  processes  in  which  he  works,  the  other  nine- 
tenths  to  buy  equal  amounts  of  each  of  the 
other  products. 

It  matters  not  where  any  man  happens  to 
be  working,  at  A3,  B4  or  D,  he  will  take  his 
pay,  and  apply  one- tenth  of  it  at  each  of  the 


54       THE  SCIENCE  OF  WEALTH 

retail  stages,  A1,  B1,  C1,  D1,  etc.,  so  using  an 
equal  proportion  of  it  to  stimulate  each  series 
of  trades.  In  this  way  the  general  product 
of  the  industrial  system  would  be  seen  to  be 
distributed  in  its  entirety  among  all  the 
different  groups  of  special  producers.  The 
means  by  which  this  distribution  was  ac- 
complished would  be  the  money  paid  at  each 
stage  of  production  out  of  the  retail  prices  of 
the  finished  products. 

A*  A*  A*  A1  A 

B*  B3  B9  B1  B 

C*  C3  C9  C1  C 

D*  D»  D1  D1  D 

E4  E3  E9  E1  E 

J<4  p3  pt  pi  p 

G*  G3  G*  G1  G 

/4  P  I3  f1  I 

/r4  AT*  K*  K1  K 

Though  the  actual  process  of  exchange  and 
distribution  is,  of  course,  far  more  complex, 
this  is  a  true  account  of  its  essential  character. 
Every  man  exchanges  portions  of  his  special 
product  for  the  special  products  of  every  other 
man.  So  we  see  how  the  needs  and  actions 
of  the  consumer,  expressed  through  money, 
form  a  perpetual  bond  of  union  between  all  the 
industrial  processes.  The  industrial  system 
thus  exists  primarily  as  a  great  co-operative 


HOW  THE   SYSTEM   WORKS       55 

society  of  consumers.  For  it  is  the  pecuniary 
stimuli  proceeding  from  consumers  that  are 
seen  to  maintain  the  industrial  structure  at 
each  point  and  to  stimulate  its  regular  activity. 

This  industrial  apparatus,  thus  depicted, 
seems  to  resemble  an  elaborate  automatic 
machine  for  the  supply  of  chocolate  and 
matches.  Put  a  penny  in  the  slot,  you  receive 
an  article  and  its  removal  causes  each  other 
article,  placed  at  a  greater  or  less  distance 
from  the  outlet,  to  move  one  step  nearer.  So 
in  our  machine  the  money  paid  over  the  retail 
counter  stimulates  a  movement,  first  along  the 
main  line  of  processes,  then  down  the  tributary 
trades  engaged  in  feeding  this  branch  of  pro- 
duction. Its  secondary  effect,  the  spending 
of  the  income  received  by  each  class  of 
producer,  which  applies  a  stimulus  at  each 
other  retail  trade,  seems  equally  automatic. 

Thus  we  get  an  image  of  a  fixed  system  of 
industry,  grinding  out  products  and  distribut- 
ing them  with  mechanical  exactitude.  Every 
owner  of  a  factor  of  production,  worker,  land- 
lord, capitalist,  employer,  receives  a  portion 
of  the  price  of  the  final  product  his  factor  helps 
to  make,  the  money  accurately  furnishing  the 
stimulus  necessary  to  maintain  his  factor  of 
production  and  to  evoke  a  new  productive 
act.  The  whole  product,  constituting  the 
"  real  income  "  of  the  industrial  community, 
would  be  distributed  among  the  owners  of  the 


56       THE   SCIENCE  OF  WEALTH 

factors,  according  to  some  law  of  mechanical 
necessity,  just  as  the  energy  generated  by  a 
dynamo  is  applied  at  each  point  in  the  factory 
where  it  is  wanted,  in  amounts  accurately 
adjusted  to  the  "  work  "  there  to  be  done. 

The  "  real  income  "  of  every  man,  i.  e.  the 
amount  of  general  commodities  which  he  got, 
and  his  "  money  income,"  i.  e.  the  money 
payment  received  for  the  use  of  his  labour 
power,  capital,  land  or  ability,  would  be  just 
what  they  must  be  to  enable  his  factor  to 
function.  There  would  be  no  problem  of 
distribution.  The  real  income  of  the  com- 
munity would  consist  entirely  of  the  aggre- 
gate of  finished  goods  and  services  which 
regularly  came  out  of  the  industrial  machine. 

Such  an  account  differs  in  two  important 
ways  from  the  actual  system  of  modern 
industry.  It  assumes  complete  fixity  of 
industrial  structure,  and  it  assumes  that  the 
product  of  industry  leaves  no  surplus  over 
what  is  required  to  maintain  the  system  and 
evoke  its  regular  activity.  Now  both  these 
assumptions  are  false.  The  industrial  system 
is  no  rigid  mechanism.  Its  structure,  com- 
position and  working  are  not  fixed.  Its  con- 
stituent trades  and  businesses  grow  and  decay 
or  change  their  character.  The  quantity  and 
the  sorts  of  plant  and  labour  and  other  factors 
alter  with  changes  of  industrial  technique  or  of 
business  organization,  and  such  changes  are 


HOW  THE   SYSTEM  WORKS       57 

always  taking  place.  Within  the  last  genera- 
tion, the  supersession  of  hand- work  by  machine- 
work  in  the  manufacture  of  shoes  has  com- 
pletely transformed  the  structure  of  that  trade. 
In  every  industry  and  every  country  similar 
changes  are  always  taking  place  at  a  slower  or 
a  faster  pace.  In  an  age  of  industrial  progress 
we  must  above  all  things  study  the  laws  of 
industrial  growth,  how  a  business  or  a  trade 
increases  its  size  and  improves  its  structure 
and  its  working. 

Equally  false  is  the  second  supposition,  viz. 
that  the  product  of  industry  only  just  suffices 
to  supply  the  necessary  stimuli  to  keep  the 
system  working.  When  the  boots,  loaves, 
shirts,  and  other  final  commodities  turned 
out  of  the  various  streams  of  industry,  are 
sold,  the  incomes  paid  for  producing  them  are 
not  entirely  absorbed  in  payments  for  the 
various  retail  commodities. 

Part  of  the  money  paid  as  rent,  interest, 
profit,  wages  is  not  applied,  as  we  have  hitherto 
assumed,  to  demand  consumers'  goods.  It  is 
applied  not  at  the  end  of  the  various  lines  of 
production,  but  at  some  interim  point  to  cause 
the  creation  of  new  forms  of  producers'  capital. 
In  other  words,  it  is  saved,  not  spent. 

So  important  is  a  clear  apprehension  of  the 
terms  "  saving  "  and  "  spending  "  that  we 
will  here  recall  our  outline  diagram  of  industry. 

If  the  working  of  this  system  were  such  that 


58       THE   SCIENCE  OF   WEALTH 

the  quantity  of  consumers'  goods  it  could  turn 
out  at  E  only  just  sufficed  to  supply  the  needs 
of  the  various  owners  of  instruments  of  pro- 
duction at  A,  B,  C,  D  and  E,  and  at  the 
different  points  in  the  tributary  streams  a1,  b1, 
c1,  etc.,  no  growth  of  the  system  would  be 
possible.  All  the  incomes,  or  money  pay- 
ments, made  at  the  various  stages,  would  be 
regularly  taken  to  E  to  be  spent  in  consumers' 
goods.  But,  if  the  system  were  able  to  turn 


out  a  larger  quantity  of  consumers'  goods  than 
were  required  for  the  bare  satisfaction  of  these 
needs,  it  would  be  possible  to  apply  some  part 
of  the  apparatus,  not  to  the  production  of 
consumers'  goods,  but  to  the  production  of 
more  plant  and  other  fixed  capital  and  to 
getting  with  this  increased  machinery  of 
production  larger  amounts  of  raw  materials 
and  power.  Though  the  ultimate  object  of 
such  a  proceeding  is,  of  course,  to  cause  more 


HOW  THE   SYSTEM   WORKS       59 

consumers'  goods  to  be  procured,  the  immediate 
effect  is  to  cause  less  consumers'  goods  to  be 
produced.  In  other  words,  some  of  the  money 
paid  as  income  to  the  owners  of  capital,  land, 
labour,  ability,  instead  of  being  applied  to 
demand  more  consumers'  goods  at  E,  is  applied 
at,  say,  a1  or  c1.  So,  instead  of  money  pay- 
ments circulating,  as  we  have  shown,  from  E 
through  the  direct  line  of  productive  processes 
from  E  to  A  and  down  all  the  tributaries,  this 
money  is  applied  at  a1,  a2,  a3,  or  c1,  c2,  c3, 
as  a  special  stimulus  to  the  creation  of  more 
plant  to  be  established  at  A  and  C. 

This  is  the  true  industrial  meaning  of  Saving, 
the  spending  of  money  income,  not  in  buying 
consumers'  goods,  but  in  buying  producers' 
goods;  not  in  stimulating  production  along 
the  main  line  of  production  of  consumables, 
but  in  stimulating  a  series  of  productive  trades 
engaged  in  making  plant  or  other  forms  of 
capital  at  some  particular  stage.  This  abstain- 
ing from  the  purchase  of  consumers'  goods,  in 
order  to  buy  more  plant  and  other  producers' 
goods,  is  evidently  the  only  means  of  effecting 
the  growth  and  improvement  of  the  material 
system  of  industry.  Here  again  money  is  seen 
as  the  directing  force.  The  saving  or  the 
spending  of  £1  causes  directly  the  same 
stimulus  to  industry  and  to  employment  of 
the  factors  of  production,  but  the  stimulus  is 
applied  at  different  points  of  the  industrial 


60       THE   SCIENCE  OF  WEALTH 

system  and  has  a  different  effect.  In  the  case 
of  spending  it  acts  directly  down  a  series  of 
main  processes  of  production,  evoking  energy 
to  produce  consumers'  goods  which  are  taken 
out  of  the  industrial  system  to  be  consumed. 
In  the  case  of  saving  it  acts  directly  down  a 
side  channel  of  producers'  processes,  evoking 
energy  to  produce  more  capital  goods,  which 
are  not  taken  out  of  the  system  but  remain 
there  as  instruments  of  further  increase  of 
production.  To  the  ordinary  business  man 
saving,  at  first  sight,  seems  a  merely  negative 
industrial  act,  i.  e.  not  spending,  and  putting 
the  not-spent  money  in  a  bank.  But  actually 
it  is  as  positive  ^in  industrial  act  as  spending. 
Indeed,  as  we  see,  it  is  spent,  but  in  paying 
people  to  make  more  capital  goods  instead  of 
paying  them  to  make  more  consumers'  goods. 
This  is  what  spending  and  saving  of  income 
mean  from  the  standpoint  of  the  industrial 
organism  and  society.  Of  course  it  is  true 
that  an  individual  may  save  in  another  way, 
viz.  by  lending  his  "  savings "  to  another 
person  to  spend  them.  A  great  deal  of 
"  savings  "  passes  in  this  way  into  the  hands 
of  spendthrift  individuals  or  bogus  company 
promoters  and  other  business  sharpers,  who 
spend  the  money  which  "  saving  "  persons 
thus  fail  to  save.  Such  false  saving  adds 
nothing  to  industrial  capital,  it  simply  means 
that  one  set  of  persons  buys  consumers'  goods 


HOW  THE  SYSTEM   WORKS       61 

instead  of  another.  The  "  paper  savings  "  thus 
effected  are  devoid  of  industrial  substance. 

True  saving,  however,  is  the  means  by  which 
the  industrial  system,  on  its  capital  side,  grows. 
It  always  implies  that  certain  individuals, 
instead  of  applying  some  part  of  their  money 
income  in  stimulating  production,  by  purchas- 
ing retail  consumptive  goods,  apply  it  in 
stimulating  production  by  purchasing  capital 
goods  in  addition  to  those  which  hitherto 
sufficed  to  maintain  the  current  of  production. 
Some  hoarding  of  consumable  goods  may  be 
classed  under  saving,  but  in  a  general  sketch 
of  the  working  of  industry  it  may  be  dis- 
regarded. The  usual  result  of  saving  is  to 
increase  the  quantity  or  improve  the  pro- 
ductive quality  of  the  industrial  system,  thus 
enabling  it  to  produce  an  increased  volume  of 
goods  in  a  given  time,  provided  that  a  sufficient 
rise  in  the  rate  of  future  consumption  main- 
tains the  activity  of  the  increased  plant. 

Turning  once  more  to  our  industrial  system 
as  a  mechanism  for  producing  ten  sorts  of 
commodities — loaves,  boots,  shirts,  etc.;  and 
distributing  them  so  that  one-tenth  of  each 
sort  passes  to  each  of  the  ten  classes  of  pro- 
ducers, we  must  revise  our  picture.  If  pro- 
vision is  to  be  made  for  the  industrial  growth 
of  such  a  society,  we  must  suppose  that  the 
quantity  of  loaves,  boots,  etc.,  which  such  a 
system  could  turn  out,  is  in  excess  of  what  is 


62       THE   SCIENCE  OF  WEALTH 

needed  by  its  members,  or  at  any  rate  by  some 
of  them,  and  that  some  of  the  industrial  energy 
which  might  have  gone  to  making  loaves, 
boots,  etc.,  is  able  to  be  diverted  into  making 
improved  machinery  for  flour  mills  and  boot 
factories,  or  into  producing  new  sorts  of  plant 
for  making  sorts  of  goods  not  included  in  the 
ten  accepted  lines  of  necessaries.  This  division 
of  industrial  energy  is  caused  by  the  process 
which  we  call  saving,  or  the  application  of 
purchasing  power  at  points  of  the  industrial 
system  other  than  the  retail  shop.  As  the 
application  of  money  stimulates  not  only 
capital  but  the  other  factors,  so  "  saving  "  not 
only  causes  more  plant,  machinery  and  other 
forms  of  capital  to  come  into  existence,  but 
causes  the  other  factors,  including  labour,  to 
dispose  themselves  differently  from  what  they 
would  have  done  if  there  were  no  saving. 

For  as  a  demand  for,  or  purchase  of,  con- 
sumable goods  is  seen  to  act  as  a  demand  for 
the  employment  of  capital  and  labour  all  along 
the  series  of  productive  processes,  so  a  demand 
for  more  productive  capital,  due  to  saving, 
acts  as  a  demand  for  more  employment  of 
capital  and  labour  in  the  machine-making  and 
other  plant-making  industries. 

In  an  industrial  system,  where  progress  by 
saving  is  thus  attained,  the  real  income  is  no 
longer  measured  merely  by  the  quantity  of 
products  produced  for  consumption  in  a 


HOW  THE   SYSTEM   WORKS        63 

given  time.  The  new  machinery  and  other 
capital  added  during  the  year  to  that  which 
previously  existed,  also  belongs  to  the  income 
of  the  year.  If,  therefore,  we  accept  the  sum 
of  £1,800,000,000  as  measuring  approximately 
the  year's  money  income  of  the  British  nation, 
the  "  real  "  income  corresponding  to  it  will 
consist  partly  of  the  goods  and  services  which 
during  the  year  have  been  withdrawn  for 
consumption  by  consumers,  partly  of  the 
additions  made  during  the  year  to  the  various 
sorts  of  fixed  and  circulating  capital.  When- 
ever a  money  income  has  been  received  by  any 
one  as  payment  for  the  use  of  his  labour,  land, 
capital  or  ability,  one  of  these  two  sorts  of 
product,  or  "  real  "  income,  has  been  produced 
to  correspond.  For  the  receipt  of  such  money 
payment  is  nothing  but  a  financial  register 
of  some  productive  act  performed  either  by 
the  recipient  or  by  some  productive  instru- 
ment he  owns.  Whether  this  productive 
act  consists  in  altering  the  shape  of  some 
sort  of  material,  changing  its  place,  or  assisting 
to  get  it  into  the  hands  of  some  one  who 
needs  it,  or  whether  it  consists  in  rendering 
some  professional,  official  or  personal  service 
which  ranks  as  "  wealth,"  all  such  acts  con- 
tribute to  the  real  income  of  the  nation,  i.  e. 
that  sum  of  tangible  or  intangible  goods  which 
have  a  market  value  and  have  been  added 
during  the  year  to  the  total  stock  of  wealth. 


CHAPTER  V 

COSTS    AND    SURPLUS 

THE  product  of  industry,  which  constitutes 
the  real  income  of  a  community,  is,  as  we 
see,  entirely  distributed  in  payments  to  the 
owners  of  labour,  land,  capital  and  ability 
for  the  use  of  these  factors.  These  payments 
made  at  the  several  stages  of  production  are 
"  expenses  of  production." 

These  payments,  we  recognize,  must  make 
provision  in  a  stationary  industrial  system 
for  the  maintenance  of  the  fabric  of  industry, 
i.  e.  the  various  factors  in  their  existing  size 
and  efficiency.  In  a  progressive  industrial 
system,  such  as  that  with  which  we  are 
familiar,  they  must  in  addition  evoke  an 
increase  and  an  improvement  of  the  fabric. 
In  a  stationary  system  the  whole  of  the 
payments,  which  formed  the  money  income 
of  the  owners  of  the  factors,  would  be  spent 
in  buying  commodities,  the  retail  goods  and 
services  turned  out  by  the  different  series  of 
productive  processes.  These  goods  and  ser- 

64 


COSTS  AND   SURPLUS  65 

vices  when  bought  would  be  withdrawn  from 
the  industrial  system  and  consumed. 

In  a  progressive  system  a  part  of  the 
income  of  the  owners  of  the  factors  would  be 
applied  not  to  buy  commodities  but  to  buy 
new  plant  and  other  forms  of  productive 
goods  capital,  which  when  bought  would 
remain  as  a  permanent  addition  to  the 
structure  of  industry,  representing  an  in- 
creased power  of  producing  commodities. 

But  if  the  size  and  efficiency  of  the  indus- 
trial system  is  to  be  increased,  provision 
must  be  made  not  only  for  increased  size 
and  efficiency  of  capital  but  for  some  cor- 
responding increase  in  labour  and  ability. 
Now  this  increase  of  labour  and  ability  is 
procured  by  buying  consumable  goods  which 
by  their  consumption  promote  economic 
efficiency  in  preference  to  buying  those 
which  do  not,  i.  e.  by  what  is  called  "  pro- 
ductive "  instead  of  "  unproductive "  ex- 
penditure. If  saving  persons  furnish  in- 
creased or  improved  machinery  of  production, 
the  full  advantage  of  their  action  can  only  be 
reaped  on  condition  that  the  general  expendi- 
ture upon  commodities  is  such  as  to  provide 
an  increased  quantity  and  an  improved 
quality  of  labour  and  ability. 

This  does  not  imply  that  all  expenditure 
on  luxuries  or  upon  comforts  and  amusements 
which  do  not  make  directly  for  economic 
c 


66         THE   SCIENCE  OF  WEALTH 

efficiency  is  absolutely  wasteful  and  injurious. 
For  there  are  other  purposes  of  life  besides 
the  economic.  But  it  does  imply  that  the 
expenditure  shall  be  such  as  to  provide  such 
increase  and  improvement  of  labour  and 
ability  as  shall  keep  pace  with  the  increase 
and  improvement  of  the  capital  structure. 
(The  increased  application  of  land,  the  other 
factor,  being  procured  by  an  application  of 
new  capital,  e.  g.  by  road-making,  does  not 
require  separate  recognition  here.)  In  an 
advancing  industrial  community,  then,  the 
income  will  be  applied  in  three  ways.  One 
part  will  go  to  costs  of  maintenance  for  the 
several  factors,  one  to  costs  of  increase,  and 
a  third  to  unproductive  expenditure.  Now 
each  factor  of  production  has  its  own  costs 
of  maintenance.  First  let  us  look  at  labour. 
The  costs  of  maintenance  mean  provision 
of  necessaries  of  life  for  the  various  grades  of 
workers,  with  any  further  expenditure  for 
keeping  up  the  supply  of  labour  at  the  existing 
level  of  efficiency.  This  is  commonly  known 
as  a  subsistence  wage.  It  just  suffices  to 
enable  and  induce  a  worker  to  keep  on  working 
and  to  bring  up  a  family  large  enough  to 
supply  another  worker  to  take  his  place  when 
he  is  done.  For  various  grades  and  quali- 
ties of  labour  the  amount  of  this  subsistence, 
of  course,  will  differ.  There  will  be  some 
difference  for  individual  workers  in  every 


COSTS   AND   SURPLUS  67 

occupation,  according  with  their  particular 
physique  and  their  circumstances.  This  pro- 
vision may  be  regarded  as  a  "  wear  and  tear  " 
fund,  the  minimum  towards  which  wages 
were  always  supposed  to  tend  according  to 
"  the  iron  law." 

Where  higher  elements  of  skill  or  intelli- 
gence are  involved  in  work,  this  bare  sub- 
sistence may  rise  considerably  higher  than 
the  mere  maintenance  of  physical  life,  con- 
taining some  provision  for  education,  recre- 
ation and  other  forms  of  expenditure,  so  far 
as  they  are  needed  to  maintain  the  existing 
fund  of  physical  and  mental  energy.  Mana- 
gerial or  professional  ability  may  thus,  even 
if  we  ignore  the  conventional  part  of  a  stan- 
dard of  comfort,  require  a  relatively  high 
salary  as  pay  for  bare  subsistence. 

To  this  subsistence  wage  of  the  human 
factors  must  be  added  a  corresponding  pro- 
vision for  capital  and  land.  Here  an  import- 
ant distinction  comes  out.  The  provision 
for  maintenance  of  labour  forms  a  part, 
usually  the  largest  part,  of  Wages.  But  the 
payment  for  the  maintenance  of  capital  is 
not  included  under  interest,  nor  the  payment 
for  maintenance  of  land  under  rent.  The 
maintenance  of  capital  is  furnished  by  a  de- 
preciation fund  applied  to  replacing  worn- 
out  or  obsolete  forms  of  plant,  etc.  Interest 
is  an  additional  payment  to  owners  of  capital 


68       THE   SCIENCE   OF  WEALTH 

after  this  depreciation  has  been  met.  Similarly 
in  the  case  of  land,  the  provision  for  the  re- 
placement of  productive  powers  taken  out 
of  the  land  is  not  rent :  a  tenant  must  engage 
to  "  keep  up  "  the  land  and  to  pay  rent  as 
well.  Economic  rent,  like  interest,  is  a  pay- 
ment over  and  above  the  provision  for  main- 
tenance of  the  factor  of  production. 

The  costs  of  maintenance  of  the  industrial 
system  consist,  then,  of  (1)  a  number  of  sub- 
sistence wages  and  salaries  for  the  various 
sorts  of  labour  and  ability,  (2)  a  number  of 
"  wear  and  tear  "  funds  for  the  upkeep  of 
the  various  sorts  of  capital  and  land.  These 
may  be  considered  a  first  charge  upon  the 
industrial  product.  Unless  adequate  pro- 
vision is  made  for  all  of  them,  the  system 
is  starved,  its  fabric  is  "  let  down  "  and  its 
productive  power  reduced.  Such  starvation 
sometimes  occurs,  even  in  countries  where 
upon  the  whole  a  high  development  of  indus- 
try has  been  attained.  Under  a  bad  mode 
of  tenancy  farmers  may  let  down  the  land. 
Under  the  pressure  of  shareholders  for  divi- 
dends a  railway  or  an  industrial  company 
may  not  make  a  sufficient  payment  out  of 
gross  profits  into  the  depreciation  and  insur- 
ance funds  ;  or  a  telephone  or  tramways 
business,  about  to  pass  under  public  owner- 
ship upon  agreed  terms,  may  fail  to  maintain 
its  plant  in  full  efficiency.  Such  incidents, 


COSTS  AND   SURPLUS  69 

however,  are  abnormal.  In  general  the  ob- 
vious self-interest  of  the  controllers  and 
managers  of  industry  secures  the  payment  of 
the  costs  of  maintenance. 

If  the  whole  of  the  industrial  product  were 
absorbed  in  these  costs  of  maintenance  there 
could  be  no  industrial  progress.  But  if  there 
remains  some  surplus,  after  this  provision 
has  been  made,  the  whole  or  part  of  it  may  be 
applied  to  increasing  the  size  or  improving 
the  quality  of  the  industrial  system.  The 
payments  made  for  this  purpose  may  be 
called  "  costs  of  progress."  They  will  con- 
sist of  the  minimum  payments  needed  to  call 
into  industrial  use  the  various  sorts  and 
quantities  of  additional  labour,  land,  capital 
and  ability  needed  for  effective  co-operation 
in  the  enlarged  structure  of  industry.  Each 
of  these  additions  involves  the  application 
of  an  extra  stimulus  beyond  that  required 
to  secure  the  mere  maintenance  of  the  exist- 
ing factors.  More  or  better  labour  power 
can  only  be  obtained  by  the  payment  of  a 
wage  higher  than  the  bare  subsistence  wage. 
This  "  wage  of  progressive  efficiency  "  will 
operate  in  several  ways  to  increase  and  im- 
prove the  supply  of  labour  in  any  trade  to 
which  it  is  applied,  or  in  the  industrial 
system  as  a  whole.  By  the  higher  standard 
of  life  which  it  admits,  it  will  evoke  and  main- 
tain a  better  physique  and  morale  among 


70       THE   SCIENCE   OF   WEALTH 

the  workers.  Better  food,  housing  and  cloth- 
ing will  improve  the  "  home,"  raise  the 
standard  of  personal  dignity  and  intelligence 
for  the  worker,  enable  the  seeds  of  higher 
education  to  take  root  and  to  bear  fruit  in  a 
better  use  of  money  and  leisure,  and  in  the 
development  and  satisfaction  of  higher  wants. 
All  these  improvements  of  the  mind  and  body 
of  the  worker  have  their  economic  significance 
in  the  larger  quantity  or  better  quality  of 
labour  power  he  is  enabled  and  induced  to 
give  out.  Perhaps  the  most  important  direct 
result  is  the  better  care  and  education  of  the 
children,  giving  them  a  more  favourable 
start  in  life  and  thus  raising  the  efficiency  of 
the  next  generation.  This  "  economy  of 
high  wages  "  is,  of  course,  attended  by  certain 
wastes,  due  to  individual  defects  of  character 
or  bad  customs,  which  impair  the  rate  of 
progress  and  efficiency.  But  the  familiar 
instance  of  a  quick  rise  of  wages  resulting  in 
an  increased  expenditure  on  drink  need  not 
be  regarded  as  other  than  a  passing  and 
exceptional  effect. 

Although  in  more  civilized  countries  a 
general  rise  of  wages  is  not  now  attended  by 
an  increase  in  the  birth-rate,  nevertheless, 
by  reducing  the  still  high  infant  mortality, 
by  lengthening  the  effective  working  life, 
and  by  securing  that  larger  mobility  of  labour 
which  brings  workers  from  all  parts  of  the 


COSTS   AND   SURPLUS  71 

world  to  the  place  where  their  work  is  most 
productive,  it  increases  the  quantity  and 
efficiency  of  the  supply  of  labour  in  a  progres- 
sive industrial  system.  The  amount  of  in- 
come needed  to  evoke  and  sustain  the  enlarged 
and  improved  supply  will,  of  course,  differ 
in  different  industries,  countries  and  condi- 
tions of  the  arts  of  industry.  But  these 
varying  wages  of  progressive  efficiency  are 
necessary  "  costs  of  progress."  If  the  wages 
of  any  class  of  labour,  or  the  salaries  of 
any  class  of  ability,  are  increased  at  a  pace 
so  rapid  that  the  increase  is  not  absorbed 
in  higher  efficiency,  or  even  evokes  a  smaller 
or  a  worse  output  of  energy,  as  sometimes 
happens,  such  payment  comes  under  a  differ- 
ent head,  to  which  reference  will  be  made 
lower  down. 

We  have  seen  that  the  payment  of  interest 
is  not  required  to  maintain  the  existing  fabric 
of  actual  capital.1  The  depreciation  fund 
suffices  for  that.  But  if  more  or  better 
plant,  machinery,  and  other  forms  of  capital 
are  wanted,  as  they  are  in  a  progressive 

1  This  does  not,  however,  imply  that  the  payment  of 
such  interest  is  illegitimate  or  inadvisable.  It  is  both 
legitimate  and  advisable.  For  if  payment  of  interest  on 
existing  capital  were  sought  to  be  suspended,  it  is  likely 
that  the  owners  of  the  capital  would  cease  to  make  pro- 
vision against  depreciation,  using  this  fund  instead  for 
temporary  payment  of  interest  while  the  plant  was  being 
"  let  down.*' 


72       THE   SCIENCE   OF  WEALTH 

society,  some  positive  payment  of  interest  is 
usually  necessary.  For  though  the  time 
may  come  when  a  sufficient  number  of  persons 
can  be  got  to  *'  save,"  and  put  new  industrial 
capital  into  the  system,  on  condition  that 
when  later  on  they  want  to  spend  what  they 
have  saved,  they  can  do  so,  without  requiring 
that  interest  shall  be  paid  them  in  the  mean- 
time for  the  use  of  their  capital,  that  time 
has  not  yet  arrived.  A  sufficient  quantity 
of  new  plant  and  other  capital  goods  can 
only  be  got  by  paying  individuals  to  save, 
instead  of  spending,  some  part  of  their 
incomes.  The  notion  sometimes  entertained 
that  all  interest  is  an  unnecessary  or  a  wrong- 
ful payment  because  the  new  plant  and  other 
forms  of  capital  are  "  produced  by  labour," 
involves  a  double  error.  In  the  first  place, 
labour  does  not  by  itself,  unaided  and  un- 
organized, produce  anything  in  modern  in- 
dustry; it  is  only  one  of  several  co-operating 
factors.  In  the  second  place,  reflection  shows 
that  saving  involves  among  a  large  proportion 
of  savers  an  effort  or  sacrifice  (sometimes 
called  "  abstinence,"  sometimes  "  waiting  ") 
which  is  necessary  to  the  creation  and 
functioning  of  new  capital.  This  effort  or 
sacrifice,  like  other  productive  services,  must 
be  bought  and  paid  for.  The  necessary  pay- 
ment is  interest.  Though  some  saving  would 
be  done  were  no  interest  obtainable,  the 


COSTS   AND   SURPLUS  73 

full  amount  of  new  capital  needed  and  its 
apportionment  among  the  several  industries 
cannot  be  procured  in  a  competitive  indus- 
trial society  without  interest.1 

The  payment,  then,  of  ,  the  minimum 
interest  needed  to  evoke  the  saving  that  shall 
supply  fresh  capital  to  feed  the  growing 
industrial  system,  is  a  necessary  cost  of  pro- 
gress. While  the  wear  and  tear  fund  for 
the  maintenance  of  capital  will,  of  course, 
vary  in  amount  for  different  sorts  of  plant, 
buildings,  etc.,  it  might  appear  at  first  sight 
that  the  rate  of  interest  required  to  evoke 
£100  worth  of  new  capital  would  be  the  same 
whatever  concrete  shape  the  new  capital 
might  take.  And  this  is  actually  the  case 
so  far  as  fluidity  of  capital  and  freedom  of 
investment  exist.  It  is  open  to  every  saving 
person  to  put  his  savings  into  a  new  foreign 
loan,  into  Canadian  rails,  or  into  any  of  the 
countless  new  industrial  stocks  quoted  on  the 
Stock  Exchange.  He  is  thus  helping  to  build 
warships,  or  to  make  locomotives,  or  to 
furnish  machinery  and  other  plant  to  some 
new  capitalist  enterprise.  The  real  rate  of 
interest  which  he  will  be  paid  for  this  service 
will  tend  to  be  the  same  whatever  investment 

1  A  Socialistic  society,  were  such  otherwise  feasible, 
though  it  too  must  practise  abstinence  and  "  save "  for 
any  increase  in  its  capital,  need  not  pay  interest  to  any 
one.  It  will  pay  "  real  interest "  to  itself  in  the  gains 
accruing  from  its  enlarged  fund  of  public  capital. 
C  2 


74       THE   SCIENCE   OF   WEALTH 

he  selects.  This  uniformity  is  concealed  by 
the  fact  that  what  is  called  "  interest " 
commonly  includes  an  element  of  insurance 
against  risk  which  is  not  true  interest.  If 
allowance  is  made  for  this  payment  for  risk, 
which  differs  very  widely  with  different 
investments,  the  actual  rate  of  interest,  or 
payment  for  use  of  capital,  will  be  found 
to  be  fairly  uniform  over  those  fields  of 
industry  open  to  all  saving  persons  for  free 
investment.  With  the  growth  of  modern 
methods  of  finance,  especially  the  spread 
of  joint-stock  enterprise,  an  increasing  pro- 
portion of  the  industrial  structure  comes 
under  this  uniformity  of  interest.  An  Eng- 
lish doctor,  or  shopkeeper,  or  skilled  artisan, 
who  has  saved  a  couple  of  hundred  pounds, 
can  apply  his  savings  to  lay  down  rails  in 
Alberta,  to  set  up  a  motor  plant  in  Birming- 
ham, to  sink  a  shaft  in  the  Transvaal,  or  to 
furnish  electric  light  to  some  city  in  Argen- 
tina, and,  allowance  being  made  for  difference 
of  risk,  he  will  get  his  £3,  or  so,  for  each  £100 
worth  of  saving  that  he  does.  This  minimum 
interest  will,  of  course,  rise  or  fall  somewhat 
according  to  the  quantity  of  fresh  capital 
required  and  the  amount  of  surplus  wealth 
available  for  saving.  But  at  any  given  time 
there  is  a  rate  of  interest  which  is  just  enough 
to  evoke  the  required  flow  of  new  capital  into 
these  open  fields  of  enterprise. 


COSTS  AND   SURPLUS  75 

But  it  must  be  borne  in  mind  that  a  large 
proportion  of  the  business  world  does  not 
lie  exposed  to  the  free  flow  of  new  capital. 
Large  numbers  of  small  or  middling-sized 
businesses  all  over  the  world  are  furnished 
with  the  capital  they  need  by  the  private 
savings  of  business  men,  supplemented  by 
family  or  local  borrowing.  Thus  in  addition 
to  a  World  Market  for  capital  we  have 
myriads  of  little  detached  local  markets.  In 
these  markets  there  will  be  various  special 
rates  of  interest,  corresponding  to  the 
special  rates  of  wages  in  the  various  labour 
markets. 

A  rise  of  interest,  like  a  rise  of  wages,  will 
operate  in  two  ways  to  evoke  a  larger  or 
better  supply  of  productive  power.  It  will, 
in  the  first  place,  stimulate  the  owners  of 
existing  plant  and  other  capital  to  make  a 
fuller  use  of  it.  Machinery  will  be  speeded 
up  ;  where  possible,  double  shifts  will  be  put 
in  ;  reserve  machinery  will  be  brought  into 
use  ;  credit  will  be  stretched  to  its  fullest 
forms,  and  every  other  economy  of  capital 
will  be  practised.  In  the  second  place,  it 
will  evoke  more  saving,  causing  some  persons 
to  curtail  their  spending,  in  order  to  get  the 
higher  payment  offered  for  new  savings. 

What  now  of  Land  ?  We  have  seen  that  out 
of  the  product  a  provision  must  be  made  for 
the  "  upkeep  "  of  land,  but/that  this  "  cost 


of  maintenance  "  is  not  rent.  In  a  growing 
industrial  system  more  use  of  land  will  be 
required  to  co-operate  with  the  larger  quan- 
tity of  labour  and  capital.  The  land  already 
employed  must  be  cultivated  more  intensely 
or  otherwise  put  to  better  use,  or  else  land  not 
hitherto  used  at  all  must  be  brought  into  re- 
quisition. Both  these  processes  involve  expen- 
diture. In  order  to  bring  into  use  more  land, 
roads  must  be  made,  land  must  be  cleared, 
drained,  fenced  and  otherwise  equipped  for  use. 
If  land  already  in  use  is  to  be  cultivated  more 
intensely,  more  expenditure  of  capital  in  so 
cultivating  it  is  incurred,  and  a  larger  pro- 
vision may  be  required  to  meet  the  more 
rapid  exhaustion  of  the  soil.  In  both  cases, 
however,  the  "  cost  "  involved  is  a  capital 
expenditure.  It  is  not  rent.  So  far  as  main- 
tenance and  improvements  are  concerned 
land  is  capital.  The  payment  called  Rent 
belongs  to  a  different  category. 

We  are  now  in  a  position  to  make  a  pre- 
liminary reckoning  of  the  payments  or  pro- 
visions to  be  made  out  of  the  annual  product 
for  maintenance  and  growth  of  the  industrial 
system.  First,  there  are  the  costs  of  main- 
tenance, or  wear  and  tear  fund,  for  the 
different  factors  of  production. 

Secondly,  there  are  the  costs  of  growth, 
operating  in  two  ways :  (1)  by  evoking  a  better 
or  intenser  use  of  the  labour,  land,  capital 


COSTS   AND   SURPLUS  77 

or  ability  already  in  use,  (2)  by  calling  into 
use  new  supplies  of  these  factors. 

If  the  whole  product  were  compelled  by 
some  necessary  law  of  Nature  to  apportion 
itself  among  these  several  uses  so  accurately 
that  it  was  wholly  absorbed  in  these  costs  of 
maintenance  and  growth,  we  should  have 
a  completely  rational  and  socially  satisfactory 
system  of  production  and  distribution  of 
Wealth. 

So  far  as  mere  maintenance  and  its  "  costs 
of  production  "  are  concerned,  powerful  laws 
of  necessity  do  compel  a  fairly  full  and 
accurate  provision.  For  though  workers  in  a 
trade  may  be  "  sweated,"  in  the  sense  that 
they  are  not  paid  a  true  subsistence  wage, 
this  can  only  occur  where  either  these  workers 
are  subsidized  from  some  other  source,  or 
where  this  worn-out  labour  power  can  be 
replaced  out  of  a  reserve  of  "  waiting  "  or 
unemployed  labour  kept  alive  out  of  some 
public  or  private  charity.  Apart  from  these 
abnormal  circumstances  (a  consideration  of 
which  will  be  found  in  Ch.  VII.)  "  sweating  " 
does  not  pay,  and  a  trade  habitually  practising 
it  cannot  live.  The  case  is  even  clearer  as 
regards  the  costs  of  maintenance  of  capital 
and  land.  A  failure  to  make  regular  and 
adequate  provision  against  wear  and  tear 
means  nothing  else  than  the  starvation  of 
the  business.  Individual  unsuccessful  busi- 


78       THE   SCIENCE  OF  WEALTH 

nesses  suffer  this  starvation,  but  trades  do 
not  thus  perish,  unless  some  change  in  the 
needs  or  tastes  of  consumers  render  them  no 
longer  useful.  A  provision  which  may  be 
regarded  as  almost  automatic  is  thus  made 
for  the  maintenance  of  the  industrial  fabric. 

But  as  regards  costs  of  growth  there  is 
no  such  security  for  adequate  provision.  The 
surplus  of  wealth  remaining  after  costs  of 
maintenance  are  defrayed  does  not  auto- 
matically distribute  itself  among  the  owners 
of  the  several  factors  of  production  in  such 
proportions  as  to  stimulate  the  new  pro- 
ductive energies  required  to  promote  the 
maximum  growth  of  production.  Instead 
of  disposing  itself  in  these  proper  proportions, 
the  surplus  may  be  so  divided  as  to  furnish 
excessive  stimuli  to  some  factors  and  defec- 
tive stimuli  to  others,  thus  retarding  that 
full  progress  of  industry  which  requires  a 
proportionate  growth  of  all  the  factors. 

In  other  words,  portions  of  the  "  Surplus  " 
may  be  wasted,  or,  what  is  the  same  thing, 
employed  "  unproductively."  Whenever  any 
owner  of  a  factor  of  production  receives  a 
payment  for  its  use  in  excess  of  what  is 
needed  to  evoke  its  full  use  he  receives  "  un- 
productive surplus."  The  simplest  instance 
is  the  rent  of  land.  We  have  seen  that  rent 
is  neither  a  cost  of  maintenance  nor  a  cost 
of  growth.  Its  payment  does  not  affect  the 


COSTS   AND   SURPLUS  79 

supply  of  land  available  for  use  in  an  indus- 
trial society.  It  is,  of  course,  true  that  where 
private  property  in  land  exists,  the  payment 
of  various  rents  may  be  necessary  in  the  sense 
that  the  landowners  may  succeed  in  demand- 
ing them  as  a  condition  of  giving  the  use  of 
their  land.  But  they  are  not  necessary  in 
the  sense  in  which  costs  of  maintenance 
or  costs  of  growth  are  necessary,  i.  e.  as  pay- 
ments for  some  voluntary  effort  or  sacrifice. 
Their  payment  evokes  no  productive  power. 
A  general  rise  of  rent  does  not  bring  into  use 
an  increased  supply  of  land  nor  does  a  fall 
of  rent  put  land  out  of  use.  (A  rise  of  rent 
for  a  particular  use  of  land,  e.  g.  wheat  growing, 
will,  of  course,  increase  the  supply  for  that 
use,  but  by  diverting  some  land  from  other 
uses.)  If  a  landowner  can  get  a  high  rent 
he  takes  it,  if  he  can  only  get  a  low  rent  he 
takes  that :  so  long  as  he  can  get  some  rent, 
however  little,  he  will  not  refuse  the  use  of 
his  land.  He  will,  of  course,  apply  his  land 
to  that  use  for  which  he  can  get  most  rent. 
So  long,  therefore,  as  land  remains  in  private 
ownership,  it  may  be  contended  that,  in 
order  to  induce  owners  to  choose  the  use 
for  their  land  which  is  most  productive,  they 
must  be  paid  some  trifling  premium.  To 
this  extent  only  can  rent  be  deemed  necessary 
in  the  sense  in  which  wages  or  interest  are 
necessary. 


80       THE   SCIENCE  OF  WEALTH 

The  same  is  true,  however,  of  any  payment 
of  interest  in  excess  of  the  minimum,  say 
8  per  cent,  required  to  evoke  the  quantity  of 
saving  needed  for  the  growth  of  the  indus- 
trial system.  If  capitalists,  willing  to  apply 
capital  at  3  per  cent,  receive  6  per  cent.,  the 
extra  8  per  cent,  stands  precisely  on  the  same 
level  with  rent.  It  is  unproductive  surplus, 
stimulating  and  supporting  no  useful  effort. 
It  is  taken  because  it  can  be  got;  if  it  could 
not  be  got  the  capital  would  be  supplied  just 
the  same.  The  same  is  true  of  any  element 
of  salary  or  of  wages  in  excess  of  the  needs  of 
progressive  efficiency  for  ability  or  labour. 

Any  payment  to  a  factor  of  production  in 
excess  of  the  costs  of  maintenance  and  pro- 
gress thus  ranks  as  unproductive  surplus. 
It  is  a  source  of  industrial  waste  and  damage 
in  three  ways.  First,  it  furnishes  no  stimulus 
to  production  Secondly,  it  takes  away  a 
portion  of  the  income,  or  annual  wealth, 
which  might  have  been  productively  applied, 
if  it  had  passed  to  some  other  factor.  Exces- 
sive payments  to  some  factors  involve  defi- 
cient payments  to  others,  and  since  industrial 
progress  depends  upon  proportionate  growth 
of  all  the  factors,  the  receipt  of  unproductive 
surplus  must  be  considered  an  obstacle  to 
industrial  progress.  Finally,  in  its  effect 
upon  the  factor  to  which  it  provides  excessive 
payment,  it  not  merely  does  not  promote 


COSTS   AND   SURPLUS  81 

activity,  it  depresses  it.  For  as  the  receipt 
of  rent,  or  excessive  interest  or  any  other 
form  of  unproductive  surplus,  enables  the 
recipient  to  satisfy  his  wants  without  any 
output  of  personal  productive  energy,  it  must 
be  held  to  have  a  negative  influence  upon 
production,  retarding  the  growth  of  industry. 
It  acts  simply  as  a  demand  for  idleness. 

So  far  as  the  industrial  system  provides 
for  the  regular  distribution  of  the  product 
in  payments  which  stimulate  the  factors  to 
maintain  or  to  increase  their  output  of  pro- 
ductive energy,  industrial  health  is  secured, 
and  complete  harmony  prevails  between  the 
several  factors.  As  it  is  not  to  the  advantage 
of  employers  or  capitalists  to  refuse  to  labour 
such  share  of  the  product  as  is  necessary  to 
sustain  labourers  and  their  families  in  the 
level  of  efficiency  needed  to  co-operate  with 
capital,  so  it  is  not  to  the  advantage  of  labour 
to  beat  down  interest  or  profits  below  the 
level  needed  to  evoke  the  fullest  use  of  capital 
and  managing  ability.  Not  merely  as  regards 
the  maintenance  fund,  but  as  regards  the 
application  of  the  productive  surplus,  there 
is  a  harmony  between  the  respective  interests 
of  labour,  capital  and  ability.  Friction, 
even  violent  conflicts,  may  sometimes  arise 
through  the  failure  of  one  or  both  parties  to 
understand  or  to  interpret  correctly  this 
harmony  of  the  three  factors.  Industrial 


82       THE  SCIENCE  OF  WEALTH 

progress,  doubtless,  has  often  been  retarded 
by  endeavours  of  unenlightened  employers, 
to  beat  down  wages  at  the  expense  of  the 
efficiency  of  labour,  or  of  unenlightened 
workers  to  attempt  to  secure  for  labour  higher 
wages  or  shorter  hours  or  other  improvements 
which  the  "  profits  "  cannot  bear.  But  so 
far  as  the  industrial  situation  is  clearly  seen  by 
all  the  parties  concerned,  there  is  a  solidarity 
of  interests  in  the  proper  apportionment  of  the 
costs  of  maintenance  and  the  costs  of  surplus. 

Discord  arises  over  the  emergence  of 
"  unproductive  surplus."  It  is  not  to  the 
interest  either  of  the  labour  or  the  capital 
in  any  trade  that  a  share  of  the  product  should 
be  paid  in  rent.  Both  are  prima  facie  gainers 
by  a  reduction  of  rent,  even  to  extinction, 
though  we  shall  see  that  both  do  not  stand  an 
equal  chance  of  securing  and  holding  the 
gain.  The  same  is  true  of  any  other  payment 
of  unproductive  surplus,  e.  g.  abnormally  high 
interests  or  salaries  or  fees.  The  only  true 
bone  of  contention,  the  only  valid  cause  of 
conflict  between  capital  and  labour,  land, 
ability,  is  the  unproductive  surplus.  It  lies 
in  the  industrial  system  a  source  of  continual 
disturbance,  breeding  economic  maladies. 

For  this  surplus  of  rents  and  other  un- 
earned and  unproductive  elements  of  income 
represents  a  large  and  growing  volume  of 
industrial  energy  diverted  from  its  socially 


COSTS  AND   SURPLUS  83 

useful  purposes  and  put  to  positively  noxious 
uses.  A  large  part  of  this  injury  consists, 
as  we  have  seen,  in  the  mal-distribution  of 
the  product  as  between  the  claims  of  the 
several  factors  to  a  share.  Rent  or  excessive 
profits  to  certain  forms  of  capital  imply  that 
labour  and  other  forms  of  capital  are  inade- 
quately fed  for  purposes  of  industrial  growth. 
But  there  is  another  injury,  sometimes 
even  graver,  which  the  taking  of  unproduc- 
tive surplus  causes.  In  our  simple  picture 
of  the  industrial  system  we  have,  in  conform- 
ity with  usage,  left  out  of  consideration  one 
factor  which  plays  an  important  part  in 
modern  industry,  namely,  the  State.  For 
though  the  State  exists  to  perform  other  than 
merely  economic  functions,  a  large  and  a 
growing  part  of  the  work  of  government  is 
concerned  with  the  protection  and  promotion 
of  industry.  The  defensive  services  of  the 
army,  navy  and  police,  a  large  part  of 
criminal  and  civil  administration,  are  con- 
cerned with  the  protection  of  private  property 
and  of  the  economic  activities  of  the  people. 
Directly  or  indirectly,  the  public  expenditure 
on  sanitation,  education  and  other  services 
for  improving  the  physique  and  morale  of 
the  people,  must  be  considered  as  contribut- 
ing to  economic  efficiency.  Much  legisla- 
tion and  administration,  central  and  local, 
is  industrial  in  its  express  intent,  concerned 


84       THE   SCIENCE  OF  WEALTH 

with  improving  the  conditions  of  labour, 
regulating  the  conduct  of  business  and  safe- 
guarding the  interests  of  the  consumer. 

So  far  as  this  work  of  the  State  contributes 
to  the  security  and  progress  of  industry, 
it  is  rightly  regarded  as  a  factor  of  production, 
co-operating  with  the  labour,  land,  capital 
and  ability  of  the  individuals  who  engage  in 
industry.  Although  the  State  is  not  recog- 
nized as  standing  at  each  stage  in  the  pro- 
cesses of  industry,  demanding  its  payment 
for  work  done,  like  the  owners  of  the  other 
factors,  it  is  none  the  less  true  that  the  State 
must  have  its  share.  It  also  needs  its  costs 
of  maintenance,  and  of  progress,  to  be  paid 
out  of  the  only  ultimate  source  of  all  pay- 
ments, the  product  of  industry.  We  shall 
concern  ourselves  later  on  with  the  methods 
by  which  the  State  comes  to  take  her  share. 
It  is  here  sufficient  to  recognize  that  she  takes 
it  by  the  same  natural  or  reasonable  right  by 
which  the  other  factors  of  production  take 
theirs,  on  the  ground  that  she  assists  to  pro- 
duce it  and  cannot  render  this  assistance 
properly  unless  she  is  paid  her  share.  For 
unless  proper  provision  is  made  out  of  the 
industrial  product  for  the  upkeep  and  im- 
provement of  the  State,  defective  public 
services  may  bring  such  insecurity  and  in- 
efficiency as  will  stop  the  flow  of  capital  and 
labour  to  the  industries  where  they  are 


COSTS  AND   SURPLUS  85 

needed,  or  prevent  them  co-operating  effect- 
ively for  the  production  of  Wealth. 

The  reason  why  it  has  been  necessary  to 
make  this  passing  reference  to  the  economic 
work  of  the  State  is  that  without  doing  so 
the  full  measure  of  the  waste  and  damages 
involved  in  the  unproductive  surplus  would 
not  be  understood.  For  the  surplus  consists 
only  in  part  of  wealth  diverted  to  owners  of 
land  and  of  favoured  forms  of  capital  and 
ability  from  other  private  factors  of  pro- 
duction. It  consists  in  part  also  of  wealth 
rightly  regarded  as  belonging  to  the  State, 
because  it  is  needed  for  the  efficient  operation 
of  the  public  services.  When  unproductive 
surplus  forms  a  large  proportion  of  the  wealth 
that  is  distributed,  it  entails  starvation  alike 
of  the  other  factors  in  the  private  industrial 
system  and  of  the  State. 

Taking  account,  then,  of  the  claims  of  the 
various  factors  of  production,  public  as  well 
as  private,  and  of  the  scheme  of  distribution 
by  which  the  industrial  product  is  appor- 
tioned among  the  owners  of  these  factors, 
we  may  thus  summarize  the  result — 


Maintenance  (cost  of  subsistence) 


Productive  Surplus  (cost  of  growth)        B 


Unproductive  Surplus  (waste) 


86       THE  SCIENCE  OF  WEALTH 

A.  Maintenance     includes     (1)     minimum 
wages  necessary  to  support  the  various  sorts 
of  labour  and  ability  required  for  the  regular 
working   of    the   industries    in    their   present 
size  and  efficiency;  (2)  depreciation  for  wear 
and  tear  of  plant  and  other  fixed  capital ;  (3) 
a  wear  and  tear  provision  for  land;  (4)  a  pro- 
vision for  the  upkeep  of  the   public  services 
which  the  State  renders  to  industry. 

B.  The    Productive    Surplus    includes    (1) 
minimum    wages    of    progressive    efficiency, 
to  evoke  a  larger  quantity  and  better  quality 
of  labour  and  ability  for  the  enlargement  and 
improvement  of  the  industrial   system ;    (2) 
such  a    minimum  of    interest  as  suffices  to 
evoke  the  supply  of  new  capital  needed  to 
co-operate  with  the  enlarged  and  unproved 
supply  of  labour  ;     (3)   a   provision   for   the 
improved   size   and   efficiency   of   the   public 
services  rendered  by  the  State  to  industry. 

C.  The  Unproductive   Surplus   consists   of 
(1)   economic   rents    of    land   and   of   other 
natural    resources  ;    (2)  all   interest  in  excess 
of  the  rate  laid  down  in  B;    (8)   all   profits, 
salaries   and   other   payments   for   ability  or 
labour  in  excess  of  what  would,  under  equal 
terms   of   competition,  suffice   to   evoke  the 
sufficient  use  of  these  factors 


CHAPTER   VI 

UNPRODUCTIVE    SURPLUS 

WE  have  seen  that  the  actual  process  of  dis- 
tribution consists  in  the  innumerable  money 
payments  made  out  of  the  prices  of  finished 
articles  to  the  different  workers,  capitalists, 
landlords,  managers,  engaged  in  helping  to 
produce  the  articles.  Not  only  are  the  costs 
of  maintenance  thus  paid  out,  but  in  the 
prices  paid  for  the  use  of  the  labour,  land 
capital,  ability  at  each  stage  of  production 
are  included  such  elements  of  surplus,  whether 
productive  or  unproductive,  as  the  owners  of 
these  factors  are  able  to  get  for  themselves. 

If,  then,  we  deem  it  necessary  to  study  the 
part  played  by  the  unproductive  surplus,  it 
is  in  the  buying  and  selling  of  the  factors  of 
production  that  we  must  study  it.  We  must 
examine  the  terms  upon  which  wages,  rent, 
interest  and  profits  are  obtained. 

It  will  be  most  convenient  to  begin  with 
the  rents  paid  for  the  use  of  land.  For  rent 
evidently  affords  the  plainest  example  of  an 
unproductive  surplus.  As  soon  as  thought 

87 


88       THE   SCIENCE  OF  WEALTH 

began  to  be  directed  towards  a  science  of 
wealth  and  industry,  it  was  perceived  that 
the  rent  of  land  differs  from  other  payments 
in  that  the  landowner  undergoes  no  personal 
effort  or  sacrifice,  and  gives  out  no  personal 
productive  force  in  return  for  the  payment 
he  receives.  The  labourer  gives  the  pro- 
ductive powers  of  his  body  for  his  wages,  the 
employer  gives  his  energy  of  mind  and  his 
time  for  his  profits,  even  the  capitalist  post- 
pones some  present  enjoyment  in  order  to 
furnish  the  capital  for  which  he  is  paid  interest. 
The  landlord  alone  takes  his  payment  for 
doing  nothing.  He  has  not  helped  to  make 
the  land  for  the  use  of  which  he  is  paid  rent. 
It  is  true  that  sometimes  he  helps  to  improve 
the  land,  making  it  more  fertile  or  more  acces- 
sible, by  expending  thought  and  capital  upon 
it.  But  in  such  cases  he  gets  a  further  re- 
muneration which,  though  sometimes  lumped 
along  with  rent,  is  not  really  rent.  For  rent, 
the  price  paid  for  the  use  of  the  natural 
properties  of  the  soil,  its  fertility,  its  advan- 
tages of  situation,  is  not  a  reward  for  any- 
thing the  landowner  has  done,  or  an  induce- 
ment for  him  to  do  anything,  it  is  simply  the 
price  of  certain  services  rendered  by  the  bit 
of  Nature  which  he  has  secured  for  his  private 
property.  If,  therefore,  we  clear  "  rent  "  of 
other  payments  for  improvement  of  the  land, 
we  see  that  economic  rent  is  entirely  an 


UNPRODUCTIVE   SURPLUS        89 

unearned,  entirely  an  unproductive,  surplus. 
Its  rise  and  its  fall  have  no  effect  upon  the 
supply  of  land  :  the  landowner  simply  takes 
as  much  or  as  little  as  he  can  get.  That  rent 
in  this  sense  was  a  surplus,  differing  from  the 
payments  made  to  induce  workers,  capitalists 
and  employers  to  apply  their  powers,  was 
early  and  clearly  recognized.  To  many  early 
economists  rent  was  the  only  surplus. 
Workers  competed  with  one  another  for  the 
sale  of  labour  power  until  the  wage  they  got 
was  the  lowest  sum  upon  which  they  could 
subsist,  or  for  which  they  would  consent  to 
work.  Capitalists  and  employers  competed 
with  each  other  so  that  interest  and  profits 
tended  to  be  cut  down  to  a  minimum.  After 
these  necessary  "  costs  "  of  labour,  capital 
and  ability,  had  been  defrayed  out  of  the 
product,  the  remainder,  the  surplus,  went  to 
the  landowner. 

This  was  the  doctrine  widely  accepted  by 
many  thinkers  who  were  not  at  all  concerned 
with  the  equity  of  the  proceeding,  and  who 
drew  no  conclusion  adverse  to  the  rights  of 
landowners  to  receive  the  rent.  It  is  held  to- 
day by  many  who  base  upon  it  an  attack  on 
private  property  in  land,  or  the  doctrine  of 
"  the  Single  Tax."  So  strong  is  their  convic- 
tion that  economic  rent  is  the  only  surplus, 
the  only  unearned  and  unproductive  element 
of  income,  that  they  attribute  to  the  landlords 


90       THE   SCIENCE   OF   WEALTH 

the  power  to  take  in  increasing  rents  the  whole 
of  the  increase  of  Wealth  produced  by  the 
modern  arts  of  industry,  beyond  the  bare 
costs  of  maintaining  the  necessary  stores  of 
capital  and  labour.  To  their  mind  rent  is  the 
unproductive  surplus. 

Now,  if  land  were  absolutely  limited  in 
supply  and  were  a  strict  monopoly  this  view 
of  rent  would  be  substantially  correct.  The 
sole  owner  of  an  island  would  be  able  to  take 
in  rent  all  the  product,  not  only  of  agriculture 
but  of  every  other  industry,  over  and  above 
the  wages  of  bare  efficiency  and  other  mini- 
mum costs  of  capital  and  ability.  He  could 
dictate  his  terms  to  the  owners  of  the  other 
factors,  for  he  could  refuse  to  each  of  them  all 
use  of  land,  without  which  their  labour,  capital 
or  ability  would  be  useless.  There  have  been, 
and  still  are,  landlords  who  possess  in  some 
localities  this  power  almost  intact.  The 
squire  who  owns  all  the  village  with  the 
surrounding  country  is  able  to  impose  on 
all  the  villagers  the  terms  on  which  they  shall 
work  and  live,  fixing  the  rate  of  wages  and 
the  rents,  the  occupations,  recreations,  the 
religion  and  the  politics  of  the  inhabitants. 
If  any  one  objects,  he  is  at  liberty  to  leave  his 
native  place  and  find  work  and  a  home  else- 
where, if  he  can.  The  ground  landlord  in 
some  towns  has  the  same  sort  of  power  over 
many  of  his  tenants.  If  he  owns  the  whole 


UNPRODUCTIVE  SURPLUS         91 

town,  or  the  whole  of  some  district  with 
special  residential  or  commercial  advantages, 
he  can  rackrent  the  shopkeeper,  the  doctor 
or  the  workman,  whose  trade,  practice  or 
employment  compel  him  to  live  in  that  town 
or  district.  The  extreme  instance  is  that  of 
the  shopkeeper  dependent  upon  local  cus- 
tomers. The  landlord,  on  a  renewal  of  the 
shop  lease,  can  evidently  raise  the  rent  so  as 
to  take  the  whole  or  nearly  the  whole  of  the 
business  gains  attributable  to  the  skill  and 
industry  of  his  tenant,  or  the  increased  profits 
due  to  the  growing  population  and  needs  of  the 
neighbourhood. 

But  though  such  extreme  cases  of  land 
monopoly  exist,  they  are  the  exception,  not 
the  rule.  The  power  of  landlordism  is  seldom 
unqualified.  The  supply  of  land  available 
for  any  given  use  is  seldom  absolutely  limited, 
and  the  whole  available  supply  does  not 
usually  belong  to  one  man.  Although  the 
Duke  of  Devonshire  may  own  the  whole  of 
Eastbourne,  he  could  not  raise  his  ground 
rents  above  a  certain  level,  for  if  he  did  many 
would-be  residents  and  lodging-house  keepers 
would  decide  to  settle  in  Bournemouth  or  else- 
where, and  tradesmen  would  follow.  With 
cheapening  transport  of  persons,  goods  and 
fuel,  a  manufacturer  is  less  bound  to  a  particu- 
lar locality  than  formerly,  and  the  increased 
mobility  enables  him  to  get  land  for  factories, 


92       THE  SCIENCE  OF  WEALTH 

warehouses,  etc.,  on  easier  terms.  The  mere 
fact  that  a  small  number  of  men  own  all  the 
best  sites  in  a  city  does  not  give  them  the 
power  of  monopolists.  Most  men  starting  a 
business  or  seeking  a  house  to  live  in  are  not 
bound  to  a  particular  estate,  they  can  choose 
between  the  vacant  sites  or  houses  belong- 
ing to  several  landlords.  Though  London 
is  still  growing  very  fast,  and  all  the  land 
is  private  property,  these  facts  have  not 
prevented  a  large  recent  fall  of  rents  in  many 
residential  neighbourhoods.  A  firm  of  print- 
ers, wishing  to  establish  printing-works  in  the 
country,  can  buy  or  hire  land  at  a  little 
over  the  agricultural  price.  They  can  do  so, 
because  any  landowner  who  should  refuse  them 
land  upon  such  terms  would  know  that  they 
could  go  elsewhere  and  get  it.  The  fact,  then, 
that  all  the  land  of  a  city  or  a  country  may 
be  owned  by  a  comparatively  few  men  does 
not  enable  rents  to  rise  so  as  to  absorb  the 
whole  industrial  surplus. 

Rent  depends  for  its  existence  and  amount 
not  upon  monopoly  but  on  scarcity.  For 
every  sort  of  business  some  land  is  essential. 
Farmer,  mining  company,  brewery,  cotton 
factory,  city  warehouse,  grocer,  lawyer,  must 
buy  the  use  of  some  land.  So  rent  must 
figure  as  an  expense  in  every  business.  Every 
one,  again,  needs  a  bit  of  land  for  a  residence, 
and  so  must  pay  a  portion  of  his  income  as 


UNPRODUCTIVE  SURPLUS         93 

rent.  Now  it  must  be  clearly  understood  that 
in  each  of  these  cases  what  is  bought  and  paid 
for  by  rent  is  a  particular  sort  or  use  of  land. 
It  is  arable  land,  pasture,  market -garden  land, 
suburban  ground,  city  site  for  a  house,  a  shop, 
a  warehouse,  a  profession,  that  is  wanted. 
Now  though  every  sort  of  business  requires 
some  land,  it  is  quite  evident  that  land  plays 
a  much  more  important  part  in  some  businesses 
than  in  others.  In  farming  and  mining  it  is 
a  factor  of  paramount  importance  :  in  the 
professions  and  in  some  branches  of  wholesale 
trade  or  in  finance  it  is  a  comparatively  trivial 
factor.  Now  those  businesses  for  which  very 
little  land  is  needed,  and  for  which  it  is  not  a 
matter  of  the  first  importance  just  where  that 
land  lies,  can  evidently  buy  the  use  of  land 
on  easy  terms.  For  their  demand  for  land 
is  small  and  the  supply  of  available  land  for 
their  purposes  is  large.  They  will  thus  be  in 
a  strong  position  to  bargain  with  landlords, 
for  they  can  make  them  compete  with  one 
another  so  as  to  beat  down  the  price.  On  the 
other  hand,  those  businesses  which  need 
much  land  or  need  land  of  a  particular  quality 
or  position  must  pay  dear  for  it,  because  their 
demand  for  the  sort  of  land  they  want  is  large 
in  proportion  to  the  available  supply  of  it. 
Farm  rents  in  Ireland,  before  the  time  of 
Land  Courts,  were  raised  to  an  intolerable 
height,  because  the  growing  population  in  the 


94       THE   SCIENCE  OF  WEALTH 

land  were  compelled  to  seek  a  livelihood  in 
the  neighbourhood  where  they  were  born  by 
bidding  against  one  another  for  a  strictly 
limited  quantity  of  sufficiently  fertile  land.  A 
mining  company  must  usually  come  to  terms 
with  the  owner,  or  one  of  a  few  competing 
owners,  of  a  very  restricted  supply  of  coal  or 
iron  lands,  its  requirements  for  successful 
operation  being  large.  We  have  already 
seen  why  the  manufacturer  not  tied  to  a 
particular  spot  is  able  to  get  cheap  land  for 
a  new  factory  while  the  local  shopkeeper  is 
liable  to  be  rackrented  on  each  renewal  of 
his  lease.  The  difference  in  the  various  cases 
is  in  the  pressure  of  the  scarcity  of  land.  The 
fact  that  the  quantity  of  land  in  England  is 
limited,  and  the  fact  that  the  quantity  of 
land  within  a  convenient  distance  of  the 
centre  of  each  town  is  still  more  limited,  do 
not  give  landlords  the  power  to  charge  what 
they  like  for  most  uses  to  which  land  is  put. 
Though  the  pressure  of  scarcity  for  certain 
purposes  in  certain  places,  e.  g.  for  shops  in 
Bond  Street,  for  banking  premises  in  the 
City,  for  allotments  outside  some  towns  or 
villages,  may  give  landlords  a  tremendous 
pull,  for  many  business  or  even  residential 
purposes  land  can  be  got  at  what  is  held  a 
"  reasonable "  rate,  because  the  effective 
supply  of  suitable  land,  though  of  course 
limited,  is  large  in  comparison  with  the 


UNPRODUCTIVE  SURPLUS         95 

demand.  The  fact  that  an  insurance  com- 
pany, making  enormous  profits,  wants  a  site 
for  a  new  branch  office,  does  not  enable  a 
landowner  to  charge  a  higher  price  than  he 
could  get  from  an  ordinary  shopkeeper  or 
other  business  man  for  the  premises.  For 
if  no  special  advantage  attaches  to  the  particu- 
lar site,  the  insurance  company  has  a  large 
supply  of  competing  land  out  of  which  to 
choose  and  need  pay  only  the  current  market 
rate. 

The  price  of  land  use,  then,  is  determined 
directly  not  by  its  utility  but  by  its  scarcity, 
and  that  scarcity  differs  in  different  places 
and  for  different  purposes.  Land  might  have 
a  high  utility  and  yet  obtain  no  rent.  This 
is  the  case  in  a  newly  opened  country  with 
plenty  of  fertile  and  accessible  land  and  a 
small  population.  Good  land  can  then  be 
had  for  the  asking,  or  for  some  quite  trifling 
sum  per  acre.  The  natural  fertility  does  not 
enable  its  owner  to  extort  a  more  than  nominal 
price  or  rent,  so  long  as  there  is  plenty  of  it 
not  yet  taken  up.  Only  when  the  farming 
population  begins  to  press  upon  the  fat  lands, 
so  that  there  is  not  any  left,  can  a  price  or  a 
rent  be  got.  If  in  a  fertile  valley  owned  by 
several  men  there  were  room  for  twenty  farms, 
equally  well  placed,  and  there  were  only 
nineteen  settlers,  the  rent  would  be  merely 
nominal,  because  the  supply  of  land  would 


96       THE  SCIENCE  OF   WEALTH 

be  in  excess  of  the  demand,  and  each  settler 
by  making  the  several  owners  compete  with 
one  another  could  drive  down  the  rent.  But 
as  soon  as  there  were  twenty-one  settlers 
asking  for  farms  the  rents  for  all  will  rise  up 
to  a  considerable  sum  per  acre.1  When 
there  were  nineteen  settlers,  land  was  in 
abundance,  labour  scarce  ;  with  twenty-one 
settlers  labour  is  abundant  and  land  scarce. 
It  is  the  coming  in  of  scarcity  which  gives 
a  price  or  rent  to  the  land.  As  the  scarcity 
increases,  up  goes  the  price  of  the  land  for 
sale  or  for  hire.  The  fertility,  the  contribu- 
tion Nature  makes  to  the  productive  processes 
of  agriculture,  remains  the  same.  The  rise 
of  rent  is  due  entirely  to  the  intenser  scarcity, 
i.  e.  to  the  fact  that  more  persons  need  the  use 
of  land. 

Now  most  land,  at  any  rate  in  a  civilized 
country,  is  capable  of  being  put  to  several 
alternative  uses.  Even  as  agricultural  land 
it  may  be  used  for  pasture,  or  for  arable,  or 
perhaps  for  fruit-growing.  If  it  is  near  a 
town,  it  may  have  other  possible  uses,  e.  g.  for 
market  gardens  or  for  suburban  building 
sites.  Now,  if  we  take  these  different  uses  of 
land  in  the  order  in  which  they  are  here 
named — pasture,  arable,  fruit-growing,  market 

1  In  fact,  up  to  a  sum  slightly  higher  thau  the  least 
efficient  or  the  poorest  of  the  twenty-one  settlers  finds  he 
can  afford  to  pay. 


UNPRODUCTIVE  SURPLUS         97 

garden,  suburban  site,  it  is  evident  that  they 
represent  a  rising  scale  of  rents.  An  acre  of 
land  available  for  all  these  uses  would  gener- 
ally earn  the  lowest  rent  as  pasture,  the 
highest  as  suburban  site  ;  the  other  uses 
fetching  different  rents  between  these  ex- 
tremes. Now  why  are  pasture  rents  per  acre 
lowest  and  suburban  site  rents  highest  ? 
Not  because  the  use  of  land  for  a  house  or 
garden  is  intrinsically  higher  than  its  use  for 
raising  cattle.  These  varying  scales  of  rental 
are  not  determined  by  utility  but  by  the 
varying  degrees  of  scarcity  which  they  inter- 
pret and  express.  An  acre  of  suburban  land 
fetches  a  high  rent  because  the  number  of 
available  acres  near  the  town  is  strictly 
limited,  and  the  suburban  population  is 
growing.  There  is  a  scarcity  of  supply.  An 
acre  of  pasture  land  fetches  but  a  small  rent, 
because  there  is  commonly  a  large  supply  of 
remote  land  available  for  this  use.  Remove 
the  scarcity  of  suburban  land  by  some 
method  of  cheap  quick  transit  which  opens 
up  large  quantities  of  equally  good  resi- 
dential land  further  out,  down  will  go  sub- 
urban site  values.  Prohibit  the  import  of 
foreign  cattle,  up  will  go  the  rent  of  English 
pasture  lands,  which  will  now  acquire  a 
scarcity  value.  Though,  then,  it  is  the 
utility  or  service  of  land  that  is  bought  by 
rent,  it  is  the  scarcity  of  the  different  sorts 
D 


98       THE  SCIENCE  OF  WEALTH 

of  land  that  determines  the  amount  of  the 
rent. 

The  growing  needs  of  an  increasing  popula- 
tion in  a  country  thus  bestows  a  set  of  prices 
and  rents  for  the  different  uses  of  the  land, 
according  to  the  scarcity  of  supply  for  the 
satisfaction  of  these  different  needs.  So, 
taking  the  land  as  a  whole,  an  average  acre 
of  pasture  will  fetch  say  10s.,  an  acre  of  wheat 
land  say  20s.,  an  acre  of  hop  land  say  80s., 
while  brick  land,  market  gardens,  suburban 
lands  will  have  their  higher  prices  for  an 
average  acre.  These  may  be  regarded  as 
the  market  prices  for  the  use  of  land  for 
different  purposes.  Of  course  there  will  be 
a  great  many  of  these  market  prices  in  differ- 
ent parts  of  the  country.  Each  suburb,  for 
instance,  will  have  a  price  of  its  own  at  which, 
or  thereabouts,  good  building  land  is  for  the 
time  being  procurable. 

These  local  or  other  differences  are  all 
matters  of  the  degree  of  scarcity,  the  pressure 
of  the  needs  of  the  population  on  the  supply 
of  land. 

The  price  of  a  particular  use  of  land,  e.  g. 
for  market  gardening  or  for  building,  being 
thus  determined,  the  different  acres  of  actual 
land  will  of  course  fetch  a  higher  or  lower 
rent  according  to  the  amount  of  this  use 
which  they  contain. 

If  scarcity  gives  a  value  of  twenty  shillings 


UNPRODUCTIVE   SURPLUS         99 

per  acre  to  ordinary  wheat  land,  then  wheat 
land  which  is  better  than  the  ordinary  will, 
of  course,  get  a  proportionately  higher  rent, 
wheat  land  which  is  worse  a  proportionately 
lower.  And  so  it  will  be  with  the  rent  for 
every  other  use  of  land.  What  is  bought 
and  paid  for  by  rent  is  so  much  utility  of 
land,  whether  for  wheat -growing,  fruit- 
growing, or  site-use.  When  one  acre  possesses 
a  larger  amount  of  this  utility  than  another 
acre,  of  course  its  rent  is  higher,  just  as  the 
weekly  earnings  of  an  efficient  workman  on 
piece  wages  are  higher  than  those  of  an  in- 
efficient workman. 

A  lot  of  mystification  has  been  imported 
into  political  economy  by  erecting  into  "  a 
law  of  rent "  these  self-evident  facts  that  a  more 
productive  acre  fetches  a  higher  rent  than  a 
less  productive  acre,  and  that  if  the  least 
productive  acre  fetches  no  rent  or  but  a 
nominal  rent,  an  acre  which  is  ten  or  twenty 
per  cent,  more  productive  will  pay  the  whole 
of  this  superior  productiveness  in  rent. 

In  point  of  fact  there  is  no  law  of  rent  at  all 
but  only  an  application  to  the  sale  of  land- 
uses  of  an  arithmetical  truism,  equally  applic- 
able to  the  sale  of  everything.  You  buy 
everything  because  it  contains  something 
useful  that  you  want,  and  the  more  it  contains 
of  that  "  something  useful  "  the  more  you 
pay  for  it.  If  one  acre  of  wheat  land  is  twice 


100    THE   SCIENCE   OF  WEALTH 

as  good  for  growing  wheat  as  another  you  pay 
twice  as  much  for  it,  if  ten  times  as  good  you 
pay  ten  times  as  much.1 

In  the  case  of  wheat  land,  what  you  buy  is 
the  ability  of  the  land  to  produce  a  quantity 
of  wheat  in  excess  of  the  cost  of  cultivation. 
If  that  "  surplus  "  or  excess  is  a  merely  nominal 
amount,  the  price,  or  rent,  paid  is  also  merely 
nominal  :  if  the  surplus  is  large,  the  rent  is 
proportionately  large.  When  the  necessary 
labour  and  capital  for  cultivating  the  land 
can  be  got  at  "  cost  "  price,  the  price  of  the 
land-use,  the  rent,  is  equivalent  to  the  entire 
surplus. 

Put  simply,  this  means  that  where  labour 
and  capital  are  abundant  and  land  is  scarce, 
the  whole  of  the  produce  due  to  the  co-opera- 
tion of  these  factors  is  taken  by  the  landlord. 
In  other  words,  rent  is  the  scarcity-price  of 
land  :  it  is  the  result  of  what  has  been  called 
"  the  niggardliness  of  Nature,"  i.  e.  the  fact 
that  in  many  places  and  for  many  industrial 
purposes  there  is  a  shortness  of  supply  of 
fertile  or  convenient  land. 

A    considerable    section    of    "  the    unpro- 

1  This  does  not,  however,  mean  that  an  acre  yielding 
30  bushels  gets  a  rent  just  twice  as  much  as  does  au  acre 
yielding  15  bushels.  That  would  only  be  the  case  if  wheat 
grew  without  human  labour  or  capital.  If  10  bushels  pay 
the  cost  of  labour  and  capital,  then  5  remain  as  a  ' '  sur- 
plus "  for  rent,  in  the  worse  acre,  and  20  in  the  better 
acre,  which  in  that  case  is  four  times  as  good. 


UNPRODUCTIVE   SURPLUS       101 

ductive  surplus  "  passes  as  rent  to  landowners 
by  reason  of  this  scarcity.  But  the  belief  that 
this  element  of  surplus  must  always  and  every- 
where grow,  because  Nature  has  set  an  absolute 
limit  on  the  supply  of  land,  is  unwarranted. 

The  supply  of  land-use  is  not  fixed.  The 
mere  facts  that  nothing  can  be  added  to  the 
surface  of  the  globe,  and  that  no  considerable 
amount  of  land  can  be  reclaimed  from  the 
sea,  are  immaterial.  For  we  are  concerned 
with  the  quantity  of  land-uses  available  for 
economic  purposes.  Now  for  these  purposes 
the  supply  is  not  fixed.  Great  Britain,  for 
instance,  does  not  depend  for  her  land-supply 
upon  her  own  small  acreage.  For  her  in- 
dustrial life,  and  her  food,  she  has  the  world 
to  draw  upon.  And  the  world  is  expanding, 
so  far  as  effective  land  supplies  are  concerned. 
Every  new  railway  in  Western  Canada,  every 
improvement  in  irrigation  inEgypt  or  Australia, 
adds  more  land  to  the  economic  supply  of 
Great  Britain  and  of  the  world.  Moreover 
each  improvement  in  the  arts  of  cultivation, 
spreading  as  it  does  ever  more  rapidly  over 
all  civilized  countries,  though  adding  nothing 
to  the  area  of  cultivation,  increases  the  quantity 
of  productive  energy  got  out  of  the  land,  which 
is  just  as  good.  Modern  science  applied  to 
agriculture  is  showing  that  enormous  increases 
of  yield  can  be  obtained  out  of  land,  with 
no  proportionate  increase  of  labour.  This  is 


102    THE  SCIENCE  OF  WEALTH 

equivalent  to  a  large  addition  of  new  fertile 
land.  So  far  as  the  interior  resources  of  the 
land  are  concerned,  the  improved  modes  of 
discovering  and  working  mines,  so  as  to  get 
out  and  obtain  coal  and  metals,  are  adding 
enormously  to  our  available  supplies.  If, 
again,  we  turn  from  the  fertility  and  treasures 
of  the  land  to  the  use  of  its  surface  for  building 
and  other  occupations,  we  need  not  assume 
an  indefinite  and  necessary  increase  of  the 
scarcity  which  expresses  itself  in  rising  site- 
values.  The  spread  of  cheaper,  quicker  and 
more  convenient  transit  adds  enormously  to 
the  quantity  of  land  available  for  these  uses, 
and  so  reduces  its  scarcity  value.  The  effect 
of  a  cheap  electric  train  and  motor  service  in 
reducing  town  rents  will  be  considerable. 

If  the  growth  of  population  kept  pace  with 
these  improvements,  or  if  the  population, 
though  increasing  more  slowly,  developed 
standards  of  consumption  making  greater  calls 
upon  the  use  of  land  for  food,  housing  and 
other  material  uses,  the  scarcity  of  land  would 
undoubtedly  enable  landlords  to  take  in  rent 
a  larger  share  of  the  "  surplus."  So  far, 
however,  as  the  civilized  world  is  concerned, 
the  net  tendency  appears  to  be  the  other  way, 
a  dwindling  rate  of  growth  of  population  with 
an  increasing  quantity  of  available  land.  In 
Great  Britain,  though  the  growth  of  town  life 
has  led  to  a  great  increase  of  site-values,  the 


UNPRODUCTIVE  SURPLUS       103 

total  pull  of  land  upon  the  surplus  wealth  has 
probably  declined  steadily  during  the  last 
century ;  not  indeed  absolutely,  but  relatively. 
Though  no  close  calculation  is  possible,  it  is 
tolerably  certain  that  the  wealth  of  Great 
Britain  has  grown  considerably  faster  than  the 
aggregate  of  rents. 

If  scarcity  of  land  produces  rent,  scarcity  of 
any  other  factor  of  production,  capital,  labour 
or  ability,  may  be  expected  to  yield  a  similar 
result.  And  so  it  does.  There  is  only  this 
difference.  Since  the  landowner  undergoes 
no  effort  or  sacrifice  requiring  compensation, 
the  whole  of  rent  is  scarcity  value.  But,  as 
we  saw,  labour,  ability  and  capital  have  to 
receive  from  the  product  their  costs  of  main- 
tenance and  growth.  It  is  only  what  they  can 
sometimes  get  in  excess  of  these  that  corre- 
sponds to  rent.  Wherever,  however,  one  of 
these  other  factors  can  get  into  the  position 
which  landlords  occupy  when  they  draw  rent, 
i.  e.  if  they  can  make  their  factor  scarce,  they 
can  get  a  similar  surplus. 

Because  capitalists  commonly  compete  with 
one  another,  it  is  sometimes  supposed  that  the 
interest  which  they  receive  cannot  contain  a 
"  surplus  "  or  scarcity  value.  A  picture  is 
presented  of  savings  pouring  into  the  industrial 
system  through  the  various  channels  of  invest- 
ment, and  filling  up  by  their  free  circulation 
every  avenue  for  the  employment  of  capital 


104    THE  SCIENCE  OF  WEALTH 

so  that  all  interest  is  forced  down  to  a  common 
level,  the  minimum  rate  sufficient  to  induce  the 
saving  public  to  continue  the  saving  process. 
There  are,  however,  in  this  description  two 
assumptions  which,  so  far  as  many  employ- 
ments of  capital  are  concerned,  are  false.  The 
first  assumption  is,  that  all  capital  can  flow 
freely  into  all  employments,  seeking  the  most 
remunerative  investment.  The  second  is, 
that  in  no  branches  of  industry  can  capital  be 
found  scarce,  in  comparison  with  land  and 
labour.  The  first  assumption  is  known  to  be 
false  by  every  business  man.  Large  profitable 
fields  of  industry  are  in  every  country  fenced 
off  against  intruders  from  outside,  so  that  the 
favoured  capital  employed  therein  can  earn 
high  dividends.  If  more  capital  is  required 
by  such  businesses  for  the  extension  of  their 
trade,  existing  shareholders  or  other  favoured 
persons  alone  obtain  the  opportunity  to  invest 
it  :  if  capital  is  wanted  from  the  outside  public, 
it  is  borrowed  at  the  market  rate,  those  who 
furnish  it  not  sharing  the  large  earnings  of  the 
company.  Well-placed  capitalists  do  not  let 
in  outsiders  "  on  the  ground  floor,"  i.  e.  giving 
them  any  share  of  the  high  remuneration  which 
their  capital  may  help  to  "  earn." 

In  every  developed  branch  of  modern  indus- 
try some  businesses  enjoy  a  position  of  high 
remuneration  for  their  capital :  sometimes 
by  amalgamation  or  by  trade  arrangements 


UNPRODUCTIVE   SURPLUS       105 

whole  industries  may  be  in  this  position.  The 
ordinary  investor  either  cannot  put  his  savings 
into  such  industries,  or  he  must  buy  existing 
shares  upon  terms  which  only  secure  for  him 
a  minimum  return,  though  the  seller  takes  in 
an  inflated  price  a  large  anticipated  future 
gain.  In  the  great  manufactures,  in  profitable 
mining  areas,  in  certain  branches  of  transport 
business  by  sea  or  land,  in  semi-public  services, 
in  some  of  the  distributive  trades,  in  banking, 
insurance  and  finance,  there  are  large  blocks 
of  well-placed  capital  obtaining  for  their 
original  or  present  owners  rates  of  interest  far 
in  excess  of  the  free  competition  rate.  Later 
inquiry  will  indicate  the  nature  of  the  advan- 
tages which  such  capitals  enjoy.  Here  it  is 
sufficient  to  recall  the  notorious  fact  of  their 
existence.  There  does  not  exist  that  perfect 
freedom  of  competition  between  all  owners  of 
capital  which  brings  all  interest  down  to  a 
common  minimum  level.  Large  masses  of 
capital  are  lifted  to  various  higher  levels  of 
interest.  Nor  can  it  be  said  that  these  higher 
earnings  are  passing  strokes  of  luck  or  trade 
booms.  Though  all  dividends  are  liable  to 
fluctuate,  these  strong,  protected  businesses 
are  less  liable  to  fluctuate  than  others,  and 
their  normal  average  earnings  over  long 
periods  of  years  attest  their  power  to  take 
"  surplus." 
The  plain  facts  of  modern  business  show  that 

D  2 


106    THE   SCIENCE  OF  WEALTH 

capital  like  land  can  get  a  share  of  unproduc- 
tive surplus.  It  gets  it  in  -the  same  way, 
through  scarcity.  But  while  land  takes  its 
surplus  by  a  natural  scarcity,  capital  takes  its 
surplus  by  making  itself  scarce,  i.  e.  by  arti- 
ficially restricting  the  flow  of  free  capital 
into  certain  channels  of  employment.  These 
restrictions,  whether  maintained  by  securing 
advantages  of  raw  materials,  power  or  situa- 
tion, by  tariffs  or  other  State  aid.  by  trade 
agreements  or  combinations,  all  signify  checks 
upon  the  free  entry  of  capital  into  a  trade 
which  is  thus  enabled  to  secure  a  scarcity  rate 
of  interest  for  the  limited  supply.  Does  any 
one  suppose,  for  instance,  that,  if  any  company 
were  really  able  to  set  up  in  England  the  busi- 
ness of  banking  so  as  to  compete  on  equal 
terms  with  the  existing  banks,  the  earnings 
upon  paid-up  capital  in  that  branch  of  industry 
would  be  what  they  are  ?  Capital  put  into  a 
place  of  vantage,  so  as  to  be  screened  from  free 
competition,  sucks  up  surplus  just  the  same  as 
land.  The  fact  that  the  whole  of  rent  is 
"  unproductive  surplus,"  whereas  part  of 
interest  is  earned,  must  not  prevent  us  from 
recognizing  the  identity  of  the  two  sorts  of 
surplus.  Both  are  unearned  incomes,  got 
because  the  natural  scarcity  of  land  or  the 
contrived  scarcity  of  capital  enables  the 
owners  of  the  scarce  factor  to  take  all  the 
surplus  product  that  remains  when  the  bare 


UNPRODUCTIVE   SURPLUS       107 

"  costs  "  of  the  more  abundant  factors  have 
been  defrayed. 

If  the  term  rent  be  applied  to  all  forms  of 
scarcity-payments  to  factors  of  production, 
this  surplus -interest  is  a  rent.  But  so  is  the 
remuneration  which  some  sorts  of  ability  or 
labour  are  able  to  secure  in  excess  of  their  wage 
of  efficiency.  Instances  of  groups  of  wage- 
earners  occupying  a  position  of  scarcity  in 
comparison  with  other  factors  of  production, 
and  thereby  enabled  to  take  a  rate  of  wages  in 
excess  of  the  current  demands  of  efficiency, 
are  not  unknown.  Cases  occur  in  new  countries 
where  plenty  of  good  virgin  soil  is  available 
and  where  capital  is  readier  to  flow  in  than 
labour.  Trade-unions  in  well-organized  trades 
have  sometimes  been  able  to  secure  for  a  time 
scarcity-wages  in  towns  or  districts  where 
capital  is  plentiful.  But  these  cases  will  be 
recognized  as  exceptional  when  a  fuller 
analysis  of  the  condition  of  the  labour  market 
has  been  presented.  It  is  only  the  higher 
forms  of  human  productive  energy,  to  which 
the  term  "  ability "  is  given,  that  show  a 
normal  capacity  to  secure  scarcity  pay.  To  the 
rents  of  land  and  capital  may  be  added  this 
"  rent  of  ability."  Now  many  of  those  who 
admit  the  rent  of  land  to  be  unearned,  and 
recognize  that  capital  may  often  take  excessive 
dividends,  are  apt  to  boggle  at  the  view  that 
any  part  of  the  remuneration  of  ability  can  be 


108    THE   SCIENCE  OF  WEALTH 

rightly  included  under  the  same  head.  This 
is  due  partly  to  the  fact  that  whereas  the 
landowner  and  the  owner  of  capital  can  live 
idly  on  the  proceeds  of  their  land  and  capital, 
the  man  of  ability  often  gives  out  continuous 
personal  productive  energy.  It  is  generally 
felt  not  merely  that  he  must  be  paid  but  that 
it  is  bad  policy  to  stint  his  pay.  Personal 
ability  of  inventors,  organizers,  overseers, 
officials,  professional  men,  artists,  skilled 
technicians  of  every  sort,  must  be  paid  upon  a 
scale  sufficient  to  evoke  their  best  work,  for 
the  higher  the  quality  of  the  utility  of  the 
work  the  greater  the  loss  from  failing  to  get 
it  at  its  best.  Since  the  nature  of  such  work, 
its  essentially  intellectual,  moral  or  artistic 
nature,  prevents  the  application  of  the  ordinary 
piece  and  time  measurements  which  regulate 
the  pay  of  most  manual  labour,  it  is  felt  that 
a  generous  remuneration  is  advisable,  so  as 
to  be  on  the  right  side.  Where,  as  has  some- 
times happened  in  the  co-operative  movement 
or  in  municipal  services,  attempts  have  been 
made  to  buy  ability  cheap,  this  economic 
lesson  has  been  driven  home  by  disastrous 
consequences. 

But  the  difficulty  and  delicacy  of  ascertain- 
ing the  rates  of  pay  needed  to  sustain  and 
evoke  the  various  sorts  of  industrial  ability 
must  not  lead  to  the  conclusion  that  ability 
is  necessarily  worth  whatever  price  it  can  get, 


UNPRODUCTIVE   SURPLUS       109 

in  the  sense  that  it  would  not  work  as  well 
if  it  could  only  get  a  lower  price.  At  present 
in  England  the  fee  among  the  recognized  first 
rank  of  surgeons  for  a  delicate  and  difficult 
operation  may  be  £100.  A  private  patient 
may  not  be  able  to  get  it  done  for  less,  and  if 
he  has  the  money  it  may  be  well  worth  his 
while  to  pay  it.  In  one  sense,  then,  it  appears 
to  be  a  payment  necessary  to  evoke  the  appli- 
cation of  this  sort  of  skill.  But  it  may  very 
well  be  the  case  that  in  Germany  this  operation 
is  performed  with  equal  skill  for  a  fee  of  £40, 
or  in  Switzerland  for  £20.  Why  so  much 
cheaper  in  these  other  countries  ?  For  two 
reasons.  First,  because  the  wider  spread  of 
opportunities  of  good  higher  and  professional 
education  bring  to  the  front  in  Germany  and 
Switzerland  a  larger  proportion  of  natural 
talent.  In  this  way  the  supply  of  first-rate 
surgical  ability  would  be  increased.  On  the 
other  hand,  the  proportion  of  rich  families 
able  to  pay  a  fee  of  £100  would  be  smaller  in 
Germany  and  Switzerland,  so  that  the  effective 
demand  for  the  operation  at  such  a  price  would 
be  smaller  than  in  England.  So,  with  a  greater 
supply  of  this  sort  of  ability  and  a  smaller 
demand  for  it  at  a  high  price,  the  fee  must  fall. 
While,  therefore,  I  must  pay  £100  in  England 
at  the  present  time  for  this  operation,  if 
improved  and  enlarged  education  brought 
more  first-rate  surgeons  to  the  front,  I  should 


110    THE   SCIENCE  OF  WEALTH 

be  able  to  buy  the  same  ability  for,  say,  £20. 
Although,  therefore,  it  may  appear  at  first 
sight  as  if  the  £100  fee  were  a  wholly  necessary 
and  reasonable  payment  for  some  rare  kind 
of  natural  skill,  it  is  evident  that  £80  of  it 
is  simply  a  rent  of  scarcity,  shifting  up  and 
down  with  the  degree  of  scarcity. 

Or  take  the  case  of  the  Town  Clerk  and  other 
high  officials  of  a  large  British  Municipality.  It 
is  reckoned  bad  public  policy  to  pay  such  men 
less  than  from  £1000  to  £1500  for  their  ability. 
But  in  Germany  or  France  there  is  every 
reason  to  believe  that  men  of  at  least  as  good 
qualifications  for  such  posts  are  procured  at 
about  half  the  salary.  The  explanation  is 
obvious,  more  equality  of  educational  oppor- 
tunities on  the  one  hand,  fewer  opportunities 
to  able  men  of  entering  other  careers  in  which 
large  surplus-incomes  are  frequently  pro- 
curable, upon  the  other,  bring  to  these  official 
posts  a  larger  number  of  well-qualified  appli- 
cants. It  is  sometimes  argued  that  a  few 
high-paid  places  may  be  necessary  as  prizes  to 
tempt  a  sufficient  flow  of  ability  into  pro- 
fessional or  business  careers  in  which  there 
are  so  many  blanks.  But  whether  applied  to 
professional  fees  or  to  business  profits,  this 
gambling  appeal  is  a  bad  economy.  The  low 
and  even  "  sweating  "  salaries  paid  to  strug- 
gling doctors  and  engineers  can  afford  no 
economic  defence  of  the  necessity  of  the 


UNPRODUCTIVE   SURPLUS       111 

extremely  large  incomes  got  by  a  few  men  at 
the  top  of  these  professions.  They  are  not 
warranted  in  claiming  that  whatever  rates 
they  are  able,  under  the  present  circumstances, 
to  obtain,  are  a  just  or  permanent  measure  of 
their  personal  services.  Indeed,  it  is  quite 
evident  that  just  as  certain  groups  of  favoured 
and  protected  capitalists  can  take  excessive 
interest,  so  certain  cliques  or  grades  of  pro- 
fessional, official  and  business  men  of  ability 
can  take  excessive  salaries,  fees  or  profits. 
These  payments  are  of  the  same  nature  as  the 
rent  of  land;  all  are  scarcity  payments  for  a 
factor  of  production  which  by  nature  or  con- 
trivance is  short  in  supply. 

Thus  interpreted,  such  of  the  surplus - 
product  as  is  not  distributed  in  costs  of  growth 
is  apportioned  among  the  owners  of  the  several 
factors  of  production  in  proportion  to  their 
"  pull."  The  particular  channel  into  which 
the  unproductive  surplus  flows  varies  in  the 
various  parts  of  the  industrial  system.  In 
some  countries  and  in  some  industries  land  is 
strongest  and  scarcest,  and  the  bulk  of  the 
surplus  goes  for  rent.  In  other  countries  and 
industries  capital  or  ability  is  short  and  land 
relatively  abundant ;  there  interest  or  salaries 
and  profits  take  more  surplus. 

This  general  conclusion  as  to  the  distribution 
of  the  surplus  is  conformable  with  common 
knowledge  in  all  countries  where  national 


112     THE   SCIENCE  OF   WEALTH 

wealth  is  on  the  increase.  The  notion,  for 
instance,  that  in  such  a  country  as  Great 
Britain  landlords  are  the  residuary  legatees 
who  take  in  rent  all  surplus  wealth  is  opposed 
to  the  plainest  evidence  of  facts.  Even  the 
widest  interpretation  of  "  economic  rent " 
cannot  assign  to  it  more  than  some  fifteen  per 
cent,  of  the  aggregate  national  income,  while 
ten  per  cent,  is  a  more  reasonable  computation. 
That  many  wealthy  families  are  sustained  in 
luxury  and  idleness  out  of  other  sources  of  in- 
come than  rent  of  land  is  obvious.  Indeed,  there 
is  good  reason  to  believe  that  the  aggregate 
income  in  this  country  which  would  count  as 
dividends  or  profits  has  during  the  past  century 
grown  at  a  far  faster  rate  than  rent.  Though 
much  of  these  dividends  and  profits  may  rightly 
count  as  "  costs  "  for  the  upkeep  and  service- 
able increase  of  the  growing  capital  and  organ- 
izing power  in  modern  industry,  there  can  be 
no  question  but  that  a  great  proportion  is 
unearned  or  "  scarcity  "  payment,  involving 
no  corresponding  effort  or  sacrifice  on  the  part 
of  its  recipients.  The  richest  men  in  most 
advanced  industrial  countries  to-day  do  not 
derive  their  riches  in  the  main  from  land,  but 
from  the  possession  of  other  instruments  of 
manufacture,  transport  and  finance,  and  the 
control  of  markets. 


UNPRODUCTIVE   SURPLUS       113 
APPENDIX 

THE   SOCIAL    WASTE    OF    UNPRODUCTIVE 
SURPLUS 

THE  prominent  position  given  in  this 
analysis  to  the  Unproductive  Surplus  makes 
it  necessary  here  to  clear  away  one  miscon- 
ception which  is  likely  to  arise  as  to  the 
part  it  plays  in  industry.  Although  the 
rents,  excessive  interest  and  other  elements 
which  comprise  this  surplus,  perform  no 
useful  service  in  stimulating  the  industrial 
activities  of  their  recipients,  it  may  appear 
that  their  general  effect  upon  industry  is 
salutary.  The  luxurious  expenditure  which 
they  render  possible  imparts  activity  to  a 
large  number  of  trades,  while  that  which  is 
not  expended  but  saved  goes  to  swell  the 
industrial  capital  of  the  nation.  Therefore, 
though  this  surplus  is  not  "  productive  "  in 
the  sense  of  sustaining  or  evoking  the  pro- 
ductive energy  of  those  who  receive  it  as 
"  unearned  income,"  it  may  be  thought  to 
be  productive  in  its  further  uses,  whether  it 
be  spent  or  saved.  But  a  closer  scrutiny 
disposes  of  this  notion.  For,  as  regards  the 
portion  that  is  expended  upon  luxuries,  it 
adds  nothing  to  the  total  volume  of  industry 
and  employment.  If,  instead  of  passing  as 


114    THE   SCIENCE   OF  WEALTH 

unproductive  surplus  to  a  receiver  of  rent 
or  excessive  profits,  it  were  assigned  by  a 
more  equitable  distribution  as  "  efficiency  " 
wages  to  labour,  it  would  still  have  been 
spent  in  demanding  commodities.  These  com- 
modities, instead  of  being  luxuries  for  the 
rich,  would  have  been  conveniences  of  life 
for  working  families.  Instead  of  increased 
employment  being  afforded  in  the  luxury 
trades,  the  same  amount  of  increased  em- 
ployment would  be  imparted  to  the  trades 
producing  working-class  conveniences.  But 
the  consumption  of  the  luxuries  would  con- 
tribute nothing  to  the  working  power  of  the 
industrial  system,  whereas  the  working-class 
expenditure  would  leave  as  a  result  an  im- 
proved efficiency  of  labour-power.  So  much 
for  the  portion  of  the  "  unproductive  surplus  " 
spent  on  luxuries. 

It  may  seem  that  the  portion  which  is 
saved,  at  any  rate,  must  be  industrially 
beneficial.  "  Unproductive  surplus  "  saved  and 
put  into  new  forms  of  capital,  it  may  be 
argued,  is  quite  as  beneficial  as  higher  wages 
expended  in  raising  the  efficiency  of  working- 
class  families.  More  capital  is  as  serviceable 
as  more  labour-power. 

But  it  cannot  be  taken  for  granted  that 
surplus  which  is  saved  and  put  into  more 
capital  is  of  necessity  as  socially  serviceable 
as  if  the  income  which  formed  that  surplus 


UNPRODUCTIVE   SURPLUS       115 

had  gone  to  raise  wages  and  the  efficiency 
of  labour.  For  we  have  recognized  that 
industrial  progress  depends  upon  a  rightly 
proportioned  increase  of  the  different  factors 
of  production.  If  then  there  were  a  tendency 
to  increase  new  capital  at  a  faster  rate  than 
the  efficiency  of  labour  were  increased,  such 
a  tendency  would  be  wasteful,  regarded  from 
the  standpoint  of  society.  Now  the  *'  saving  " 
of  large  masses  of  unproductive  surplus 
causes  just  this  sort  of  waste.  For  to  make 
large  additions  to  the  capital  structure  of 
industry,  while  the  efficiency  of  labour  is 
not  proportionately  increased,  has  two  in- 
jurious effects.  First,  it  upsets  the  adjust- 
ment of  the  factors  of  production,  labour 
lagging  behind  capital  as  a  productive  power. 
Secondly,  it  stimulates  production  beyond 
the  pace  required  to  supply  the  final  com- 
modities to  consumers,  and  so  brings  about 
the  periodic  congestions  of  the  markets 
which  are  seen  in  trade  depressions.  This  is 
the  inevitable  result  of  a  distribution  which 
creates  unproductive  surplus  out  of  income 
needed  to  raise  the  efficiency  of  wage-earners. 
For  the  rising  consumption  of  the  wage- 
earners,  who  form  the  vast  majority  of 
consumers,  is  necessary  in  order  to  take  out 
of  the  industrial  system  the  increasing  quan- 
tity of  consumables  which  its  growing  powers 
enable  it  to  produce.  That  is  to  say,  out 


116    THE  SCIENCE  OF  WEALTH 

of  the  surplus  product  in  a  progressive  society 
only  a  limited  quantity  of  income  can  ad- 
vantageously be  put  into  new  capital,  the 
rest  being  needed  to  raise  the  general  volume 
of  consumption  so  as  to  furnish  full  employ- 
ment for  this  new  capital  and  the  new  labour- 
power  which  such  a  distribution  will  evoke. 
The  chief  waste  attending  the  accumulation 
of  unproductive  surplus  is  that  it  causes  an 
excess  of  the  new  capital  to  come  into  being, 
plant  of  various  sorts  being  increased  so  fast 
that  an  attempt  to  work  the  industrial 
system  thus  overloaded  soon  brings  about  a 
glut,  followed  by  a  fall  of  prices  and  a  stop- 
page of  industrial  processes,  which  con- 
tinues until  the  glut  has  been  worked  off, 
and  trade  reviving,  the  same  vicious  round 
of  under-consumption,  over-saving,  over- 
production and  consequent  depression  again 
recurs. 


CHAPTER   VII 

WAGES 

LABOUR  stands  on  so  different  a  footing 
from  the  other  factors  of  production  in  regard 
to  the  conditions  of  its  sale  that  a  separate 
law  of  wages  has  often  been  propounded. 
Such  procedure,  however,  is  quite  un- 
warranted. For  the  price  of  labour  is  deter- 
mined like  the  price  of  the  other  factors  by 
considerations  of  cost  and  scarcity  affecting 
the  relation  of  the  supply  to  the  demand. 
(Supply  means  the  quantity  of  anything 
offered  for  sale  within  a  given  time  at  the 
current  price,  or  the  rate  at  which  anything 
is  put  upon  the  market.  Demand  means  the 
quantity  of  anything  bought  within  a  given 
time  at  the  current  price,  or  the  rate  at  which 
anything  is  withdrawn  by  buyers.)  But 
while  there  is  no  special  law  of  wages,  there 
are  conditions  peculiar  to  the  sale  of  labour, 
which  deserve  a  separate  discussion.  Unlike 
land  and  capital,  labour  cannot  be  detached 
from  the  person  of  its  owner.  When  its 
productive  power  is  used,  this  use  requires 
117 


118    THE  SCIENCE  OF   WEALTH 

the  presence  of  the  owner  on  the  spot,  and 
commonly  entails  certain  effects  upon  his 
liberty  and  life  which  are  not  easily  or  ade- 
quately counted  in  the  cost.  Risk  to  life 
or  limb,  incident  upon  employment,  seldom 
figures  in  the  wages  bargain,  while  dirt, 
disease  or  degrading  character  of  work  have 
little  influence  upon  the  rate  of  pay.  The 
wage-earner  can  seldom,  like  the  landlord  or 
the  capitalist,  withhold  the  offer  of  his  pro- 
ductive agent  for  a  while  so  as  to  raise  its 
price.  For,  in  the  first  place,  he  has  usually 
no  other  means  of  livelihood  to  keep  him 
while  he  waits.  Secondly,  if  he  could  wait, 
his  waiting  would  not  merely  waste  his  labour 
in  the  interval,  but,  by  the  starvation  and 
the  idleness  it  entailed,  would  damage  the 
efficiency  of  his  labour  afterwards.  The 
employer,  the  capitalist,  the  landlord,  can 
wait,  for  they  have  a  reserve  on  which  to 
live,  'and,  though  their  waiting  involves 
some  present  loss,  they  can  usually  recover 
it  in  the  terms  which  they  are  able  to  exact 
when  they  once  more  apply  their  land  or 
capital  which  has  not  suffered  any  wastage 
of  productive  efficiency  from  a  temporary 
withdrawal. 

Most  workers,  in  a  word,  must  sell  their 
labour  continuously  for  whatever  it  will 
fetch.  But  the  natural  condition  of  the 
labour-market  has  another  disadvantage  for 


WAGES  119 

the  sellers.  Their  labour  is  contained  in 
a  large  number  of  little  separate  pieces :  the 
capital  is  usually  concentrated  in  large 
masses  wielded  by  a  few  employers.  The 
sellers  of  labour,  then,  are  many,  the  buyers 
few.  This  is  an  obvious  advantage  to  the 
buyers,  whose  competition  with  one  another 
is  likely  to  be  less  free  and  continuous. 
Though  it  is  the  object  of  trade-unionism 
by  collective  bargaining  to  turn  the  edge  of 
this  natural  disadvantage,  it  can  only  succeed 
by  maintaining  a  more  complete  solidarity 
of  labour  than  that  which  the  employers 
can  achieve  by  their  combination.  Now 
employers,  being  fewer  and  better  informed, 
can  usually  maintain  a  stronger  organization 
than  labour,  with  a  far  larger  reserve  in  case 
of  hostilities.  Again,  where  labour  is  more 
successful,  the  conditions  of  its  powerful 
combination  usually  involve  so  rigorous  a 
guard  on  the  trade  entrances  as  to  increase 
the  difficulty  of  an  equally  effective  com- 
bination for  other  sorts  of  labour.  This 
brings  us  to  the  central  defect  in  the  capacity 
of  labour  as  a  claimant  for  the  "  surplus 
product."  For  the  distribution  of  this  sur- 
plus, as  we  saw,  depends  upon  the  scarcity 
of  the  respective  factors.  Now  land  is 
attended  by  a  natural  scarcity,  only  to  be 
overcome  partially  and  with  difficulty.  Capital 
acquires  a  position  of  scarcity  by  organized 


120    THE  SCIENCE  OF  WEALTH 

contrivance.  Ability  has  some  natural  and 
some  contrived  capacity.  But  labour  is 
naturally  abundant  and  has  shown  no  ade- 
quate power  to  establish  and  maintain  scarcity 
of  supply. 

A  few  rare  local  instances  have  occurred, 
in  the  building  or  carrying  trade  of  some 
American  city,  or  among  the  shearers  or 
other  season  workers  of  some  new  low- 
populated  country,  where  a  combination  of 
labour  has  for  a  brief  time  enjoyed  the  same 
advantages  of  shortage  which  the  ground- 
landlords  of  every  large  city,  the  employers 
in  every  well -organized  industry,  enjoy  all 
the  time.  But  the  normal  continuous  con- 
dition of  labour  in  most  countries  is  one  of 
over-supply,  in  the  sense  that  there  is  usually 
more  labour  offered  than  is  bought.  Labour 
is  the  only  factor  of  which  the  supply  gener- 
ally and  permanently  exceeds  the  demand. 
Though  restraints  upon  the  birth-rate  and 
improved  organization  of  workers  doubtless 
tend  to  diminish  this  over-supply,  they  have 
not  got  rid  of  it.  And  so  long  as  any  over- 
supply  exists,  its  necessary  effect,  so  far  as 
free  competition  operates,  is  to  drag  down 
wages  to  that  lower  level  which  covers  bare 
costs  of  maintenance,  or  such  slightly  higher 
level  as  law,  public  opinion,  custom  or 
humanity  prescribes.  For  if  there  are  thir- 
teen men  competing  for  twelve  jobs,  the 


WAGES  121 

struggle  of  each  to  escape  being  the  excluded 
one  will  drive  the  price  of  labour  to  a  mini- 
mum nearly  as  effectually  as  if  there  were 
twenty  men  competing  instead  of  thirteen. 
We  may,  then,  summarize  the  general  con- 
ditions which  distinguish  the  labour-market 
from  the  markets  for  the  sale  of  other  factors, 
by  saying  that  labour  is  naturally  more 
abundant  than  the  other  factors  and  is  less 
capable  of  correcting  its  abundance  by 
organized  contrivance. 

A  clear  understanding  of  the  nature  of  the 
wage  bargain  compels  us  to  look  more  closely 
to  the  relation  of  the  individual  worker  to 
the  labour-problem.  In  our  general  state- 
ment of  the  price  of  labour  as  a  "  cost  "  we 
assumed  that  the  price  could  not  be  less  than 
would  suffice  to  keep  the  worker  in  his  ordin- 
ary health  and  strength,  and  enable  him  to 
support  a  family  sufficient  to  replace  him 
when  his  working  time  was  over.  In  a 
progressive  industrial  society  wages  must  be 
higher  than  this  mere  "  wear  and  tear " 
pay,  including  a  stimulus  and  maintenance 
of  more  labour-power  for  the  growth  of 
industry.  If  every  family  were  of  about 
the  same  size  and  were  supported  entirely 
by  a  single  wage-earner,  an  intelligible  theory 
of  wages  might  be  constructed  on  this  basis. 
But  neither  of  these  conditions  is  fulfilled. 
Working-class  families  vary  in  size  and  in 


122    THE  SCIENCE   OF  WEALTH 

the  number  of  their  members  who  are  earning 
wages.  Now,  from  the  standpoint  both  of 
the  industrial  system  and  of  humanity,  the 
subsistence  or  efficiency  wage  means  the 
weekly  income  of  the  family.  There  is,  how- 
ever, nothing  in  the  conditions  of  the  single 
wage  bargain  to  ensure  this  family  subsist- 
ence. For  what  is  sold  in  that  bargain  is  a 
given  quantity  of  productive  power.  The 
same  price  is  given  for  a  unit  of  this  power, 
whether  it  is  given  out  by  a  man  who  must 
support  a  wife  and  six  children  out  of  the 
price  he  gets,  by  a  man  who  has  only  himself 
to  keep,  or  by  a  man  whose  wife  and  children 
are  all  earning  money.  If  the  wage  were 
a  full  maintenance  for  the  first  case,  it  would 
yield  a  surplus  for  the  second,  and  a  still 
larger  surplus  for  the  third  family.  If,  on 
the  other  hand,  it  is  only  sufficient  for  the 
single  worker,  then  the  man  supporting  a 
family  out  of  it  is  evidently  "  sweated  "  and 
unable  to  maintain  his  own  and  his  family's 
efficiency. 

It  is  true  that  by  process  of  bargaining  there 
is  some  tendency  to  fix  a  wage  sufficient  to 
defray  the  ordinary,  or  average,  expenses  the 
worker  has  to  meet.  In  most  male  employ- 
ments, for  instance,  wages  must  lie  somewhere 
above  the  amount  needed  to  support  a  single 
man,  for  otherwise  married  men  with  families 
to  keep  would  not  work  in  those  trades  and 


WAGES  123 

the  supply  of  labour  would  be  deficient.  So, 
in  most  metal  or  mining  centres,  wages  for 
men  are  somewhat  higher  for  the  same  level 
of  skill  than  in  textile  towns  where  there  is 
fuller  and  more  remunerative  employment 
for  women  and  children.  But  though  thus 
indirectly  there  is  some  tendency  to  make 
wages  conform  to  the  needs  of  family  subsist- 
ence, the  tendency  is  exceedingly  defective. 
Whereas  a  vigorous  young  Lancashire  operative 
may,  while  unmarried,  earn  a  weekly  wage 
that  yields  a  surplus  on  his  needs,  when 
married  with  a  young  family  to  keep  he  often 
finds  the  same  wage  deficient  for  their  proper 
maintenance,  while  afterwards,  if  he  still 
keeps  his  earning  power  when  they  are  old 
enough  to  get  employment,  he  may  once 
more  find  his  wages  adequate  to  meet  his 
needs.  This  fact  that  maintenance  of  labour 
depends  on  the  composite  family  wage, 
while  the  wage  bargain  regards  merely  the 
quantity  of  labour  power  given  out  by  the 
individual  worker,  is  the  greatest  crux  of  the 
wages  question.  The  typical  wage  bargain 
for  the  price  of  labour  per  piece  or  per  hour, 
is  doubly  defective  from  the  sound  economic 
standpoint.  It  does  not  secure  a  weekly 
wage  for  the  continuous  subsistence  of  the 
individual  worker,  much  less  does  it  secure 
the  whole  or  any  fixed  proportion  of  the 
family  subsistence.  Yet,  from  the  standpoint 


124    THE   SCIENCE  OF  WEALTH 

of  the  industrial  system,  it  is  this  last  fact 
that  is  essential. 

Even  where  family  needs  have  some 
indirect  influence  in  fixing  individual  wages, 
ordinary  family  conditions  alone  count.  The 
wage-system  cannot  take  into  account  the 
shoals  of  exceptional  cases,  where  the  family 
is  larger  than  usual,  where  there  is  an  invalid 
wife  or  sickly  children,  or  where  the  death  or 
disability  of  the  chief  wage-earner  throws  the 
entire  support  of  the  family  upon  the  woman. 

This  last  consideration  brings  up  the 
special  features  of  the  labour  bargain  in  the 
case  of  women.  Its  most  onerous  effects 
fall  more  heavily  on  women  than  on  men. 
For  the  fact  that  the  male  wage  is  based  in 
part  upon  a  loose  principle  that  a  man  is 
the  sole  or  chief  support  of  a  family,  while 
a  woman  is  not,  exercises  a  depressing  in- 
fluence on  the  price  of  female  labour.  In 
most  work  the  earnings  of  a  man  would  any- 
how be  greater,  because  of  the  larger  amount 
of  productive  power  he  can  give  out.  But 
this  assumption,  that  the  man  supports 
others  while  the  woman  does  not,  has  oper- 
ated to  raise  male  wages  to  a  higher  level 
over  female  wages  for  similar  work  than 
would  otherwise  have  happened.  It  has 
helped  to  make  the  customary  wage  of  men 
about  twice  that  of  women,  instead  of,  per- 
haps, one-third  more. 


WAGES  125 

The  assumption,  otherwise  expressed,  is 
that  every  woman  is  partially  supported  by 
some  man.  The  depressing  effect  of  this 
assumption  is  such  that  the  ordinary  wage 
for  able-bodied  efficient  women-workers  in 
most  skilled  and  unskilled  trades  is  below  the 
level  of  separate  maintenance.  It  is  .not  a 
question  of  some  low-skilled,  irregular,  home 
industry  like  matchbox-making  or  shirt- 
making.  The  ordinary  woman's  wage  re- 
garded as  the  sole  source  of  her  income  is  a 
sweating  wage.  The  105.  or  12s.,  the  usual 
factory  wage  outside  Lancashire,  is  not 
enough  to  keep  a  woman  living  by  herself 
in  full  efficiency  and  to  enable  her  to  provide 
against  ordinary  emergencies.  Far  more 
cruel  is  the  effect  of  the  wage-system  on  the 
large  number  of  women  who  have  to  keep 
not  merely  themselves  but  a  family  out  of 
their  earnings,  for  they  feel  the  full  brunt 
of  a  system  of  bargaining  which  may  drive 
the  piece-wage  or  the  weekly-wage  of  the 
individual  worker  indefinitely  below  sub- 
sistence point.  Though  this  is  no  place  for 
discussing  remedies  for  industrial  diseases, 
it  may  be  pointed  out  that  the  mere  insist- 
ence, either  by  legal  or  co-operative  action, 
that  women  shall  be  paid  at  the  same  rate 
for  the  same  work  as  men,  would  not,  by 
itself,  be  likely  to  do  very  much  to  raise  the 
industrial  status  or  the  wages  of  women. 


For,  in  the  first  place,  there  are  not  many 
occupations  in  which  women  are  doing  identi- 
cal work  with  men.  Again,  where  they  are 
doing  the  same  or  nearly  the  same  work, 
they  usually  hold  that  employment  on  the 
condition  of  taking  lower  wages,  and  if,  by 
legal  or  trade-union  pressure,  they  insisted 
upon  equal  pay  with  men,  they  would  be 
driven  from  the  trade.  Finally,  if  we  are 
regarding  wages  from  the  social-economic 
standpoint  as  maintenance,  since  most  women 
have  not  to  contribute  so  much  as  men  to  the 
family  maintenance,  it  is  not  so  obviously 
just  and  desirable,  as  it  sometimes  seems, 
that  they  should  be  paid  as  highly  as  men 
even  for  the  same  work.  Looking  at  labour 
as  a  mere  commodity  it  seems  equitable 
that  the  same  price  for  it  should  be  paid  to 
female  sellers  as  to  male.  But  looking  at 
it  as  a  means  of  support  for  a  working  family, 
it  is  more  important  that  the  chief  wage- 
earner  should  be  highly  paid  than  that  the 
same  rate  should  be  paid  to  the  subsidiary 
wage-earner.  Only  in  as  far  as  the  growing 
economic  activity  of  women  tends  to  make 
her  as  important  a  factor  in  the  earning  of 
the  family  income  as  the  man,  is  it  obviously 
desirable  that  the  same  rate  of  pay  should 
prevail.  This  conditional  defence  of  the 
higher  rate  for  men,  however,  does  not  dis- 
pose of  the  numerous  cases  where  the  woman, 


WAGES  127 

not  the  man,  bears  the  whole  or  the  chief 
burden  of  supporting  the  family.  These 
numerous  exceptions  require  exceptional  treat- 
ment which,  if  the  competitive  wage-system 
is  not  competent  to  accord,  should  be  a  matter 
for  public  provision.  The  fact  that  women 
are  physically  debarred  from  many  highly- 
paid  employments,  and  that  the  chronic 
over-supply  of  the  labour  in  those  open  to 
them  forces  them  to  underbid  men  and  one 
another  for  wage-work,  cannot  be  adequately 
met  by  a  policy  of  equal  pay  for  equal  work, 
and  unless  a  public  provision  for  unemployed 
women  formed  a  foundation  for  co-operative 
action  among  wage-earners,  the  enforcement 
of  this  general  maxim  of  equality  might 
seriously  worsen  women's  economic  condition. 
This  will  suffice  to  show  that,  whereas  the 
conditions  for  the  sale  of  the  use  of  land  and 
capital  must  always  be  such  as  to  make 
provision  for  full  maintenance  of  these  factors, 
the  conditions  of  the  labour  bargain  do  not 
necessarily  secure  the  subsistence  of  the 
single  worker  or  the  working-class  family. 
If  individual  bargaining  were  general,  and 
the  economic  forces  above  described  had 
unrestricted  sway,  the  condition  of  the  wage- 
earners  as  a  body  would  be  much  worse  than 
it  actually  is.  There  are,  however,  counter- 
forces  to  be  taken  into  account.  The  most 
important  of  these  is  the  intelligent  self- 


128    THE  SCIENCE   OF  WEALTH 

interest  of  the  employer.  In  many  trades 
it  would  not  really  pay  the  employer  to  buy 
all  his  labour  at  the  cheapest  rate  at  which 
he  could  get  men  to  work.  For  certain 
qualities  of  personal  efficiency,  affecting  the 
quality  of  skill,  intelligence,  responsibility, 
etc.,  could  not  be  got  from  "  sweated " 
labour.  The  good-will  of  the  workers  also 
enables  a  business  to  be  run  more  smoothly 
and  with  less  supervision.  The  recognition 
of  these  obvious  facts  has  caused  a  policy, 
which  was  always  applied  to  salaried  officials 
in  public  or  in  private  business,  to  be  extended 
in  many  cases  to  the  better  grades  of  wage- 
earners.  This  policy  is  sometimes  called 
"  the  economy  of  high  wages,"  and  is  based 
on  the  truth  that  if  you  pay  a  man  a  higher 
rate,  you  will  get  more  or  better  work  out  of 
him.  For  he  will  be  able  to  give  out  more 
labour-power  by  reason  of  the  higher  standard 
of  physical  and  intellectual  comfort  his  wages 
allow  him  to  support,  and  he  will  be  willing 
to  do  so,  because  he  will  recognize  himself 
as  having  a  personal  stake  in  the  success  of 
the  business.  Sometimes  this  extra-wage  is 
given  by  some  "  bonus  "  or  "  profit-sharing  " 
method.  But  it  always  tends  to  raise  the 
family-wage  above  the  point  of  bare  sub- 
sistence and  to  stimulate  increased  efficiency 
of  labour. 

Some  have  laid  so  much  stress  on  this  policy 


WAGES  129 

as  to  suggest  that  if  employers  could  all  be  got 
to  recognize  its  full  validity,  high  wages  and 
short  hours  would  generally  prevail,  and  all 
conflicts  between  capital  and  labour  would 
disappear.  But  this  is  a  view  that  ignores 
important  qualifications  of  the  policy.  For 
there  are  many  cases  where  "  sweating  "  is 
a  more  profitable  present  policy  for  the 
employer  than  high  wages.  In  most  of  the 
domestic  workshops  and  other  low-organized 
businesses  where  women  or  "  green  "  male 
hands  are  employed,  it  would  not  be  profit- 
able to  pay  anything  but  sweating  wages. 
Even  under  the  factory  system  and  in  many 
offices  and  retail  stores,  there  are  large 
numbers  of  workers  on  starvation  or  bare 
subsistence  wages  who  would  not  respond 
to  higher  wages  in  a  proportionate  amount 
of  increased  productivity.  It  is  foolish  to 
pretend  that  sweating  is  always  an  unen- 
lightened policy  from  the  profit-making  stand- 
point. So  long  as  there  stands  a  plentiful 
supply  of  idle  hands,  ready  to  take  the  place 
of  the  labour  exhausted  or  used  up,  it  is 
often  "  good  business  "  to  pay  the  lowest 
market  price  for  low-skilled  labour.  Again, 
where  there  is  some  disposition  among  better 
employers  to  pay  a  higher  wage  which  would 
come  home  later  on  in  increased  efficiency, 
the  competition  of  greedier  or  shorter-sighted 
rivals  often  prevents  its  application. 


130    THE   SCIENCE  OF  WEALTH 

While,  then,  it  is  indisputable  that  this 
factor  has  played  an  important  part  in  raising 
the  standard  of  wages  and  of  comfort  in  the 
skilled  artisan  classes,  it  cannot  be  relied 
upon  to  secure  for  labour  in  general  an  ade- 
quate wage  of  progressive  efficiency.  Per- 
haps its  chief  effect  has  been  to  co-operate 
with  the  forces  of  public  opinion,  trade-union 
action  and  industrial  legislation,  so  as  to 
help  to  build  up  and  maintain  a  number  of 
different  levels  of  working-class  comfort, 
roughly  corresponding  to  the  skill  and  in- 
telligence involved  in  the  various  staple 
trades. 

It  is  important  to  recognize  the  causes 
and  supports  of  these  higher  grades  of  wages 
and  of  the  standards  of  living  which  depend 
on  them.  Some  sorts  of  labour  are  more 
arduous,  more  disagreeable,  more  degrading, 
more  dangerous  than  others,  and  it  might 
seem  natural  that  these  disadvantages  must 
be  offset  by  a  higher  rate  of  pay.  But  this 
is  seldom  the  case.  For  unless  these  dis- 
advantages are  of  such  character  as  posi- 
tively to  exclude  the  ordinary  worker  from 
competing  for  the  employment,  they  do  not 
apparently  raise  the  wage-level.  Most  heavy, 
dirty,  repulsive,  unhealthy  labour  is  paid  for 
at  the  lowest  rates,  because  the  over-supply 
of  low-skilled  workers  of  average  capacity 
is  such  that  they  cannot  afford  to  take  these 


WAGES  131 

conditions  into  consideration.  Only  when 
some  unusually  high  standard  of  physique 
is  necessary,  as  in  the  case  of  certain  steve- 
dores and  foundry  workers,  does  the  arduous 
nature  of  the  work  tell  upon  the  rate  of 
wages.  Danger  or  degradation  hardly  counts 
until  it  reaches  the  limit  of  the  steeplejack 
or  the  hangman.  This  statement,  however, 
requires  one  qualification.  Though  heavy, 
disagreeable,  or  dirty  work  seldom  gets  paid 
at  a  much  higher  rate,  light,  easy  and  genteel 
conditions,  on  the  other  hand,  especially 
for  women,  depress  wages  below  the  ordinary. 
This  partly  explains  the  low  pay  of  ordinary 
clerks  and  shop-assistants.  The  only  large 
employment  in  which  personal  feelings  much 
affect  wages  is  domestic  service,  where  servil- 
ity and  loss  of  independence  are  compensated 
by  relatively  high  pay.  Trades  involving 
skill,  intelligence  and  responsibility,  gener- 
ally have  higher  levels  of  wages.  To  some 
extent  this  is  doubtless  due  to  the  considera- 
tion already  adduced,  viz.  that  a  certain 
level  of  comfort  and  security  conduces  to 
the  efficiency  of  these  sorts  of  labour.  But 
a  more  important  cause  is  the  relative  scarcity 
of  numbers  of  workers  qualified  to  do  such 
work.  When  the  working  classes  had  little 
access  to  ordinary  schooling,  the  wages  of 
clerical  skill  were  relatively  high;  free  popular 
education  has  pulled  them  down,  not  because 


132    THE  SCIENCE  OF  WEALTH 

less  skill  and  knowledge  are  needed  for  a 
modern  clerk,  but  because  a  larger  proportion 
of  young  men  and  women  are  able  to  attain 
these  qualifications.  In  a  word,  skill,  in- 
telligence and  other  personal  qualities,  like 
the  positive  disagreeabilities  attaching  to 
various  kinds  of  work,  can  only  raise  the 
wage-level  in  one  of  two  ways,  either  by 
requiring  a  higher  standard  of  subsistence 
for  the  physical  or  mental  energy  to  be  given 
out,  or  by  restricting  the  number  of  qualified 
applicants  in  the  labour-market. 

A  main  purpose  of  trade-unionism  has  been 
to  assist  these  two  tendencies.  By  helping 
to  maintain  higher  levels  of  class  comfort  for 
the  grades  of  skilled  workers,  and  by  resisting 
the  downward  pressure  exercised  by  bad  or 
unenlightened  employers,  or  by  organizations 
of  employers  in  bad  times  of  trade,  they  have 
assisted  to  maintain  the  labour  conditions 
essential  for  industrial  progress.  The  par- 
ticular restrictions  upon  entrance  into  a  trade, 
upon  output  and  the  use  of  machinery, 
have  all  been  directed  to  maintain  a  relative 
scarcity  of  labour  in  the  trade,  without 
which  collective  bargaining  would  be  in- 
effective. Parts  of  this  policy  have  been 
shortsighted  and  mistaken,  as  regards  the 
immediate  interests  of  the  workers  concerned, 
especially  the  resistance  to  labour-saving 
machines  in  trades,  where,  as  in  printing, 


WAGES  133 

cheapening  of  production  would  quickly 
stimulate  demand  so  largely  as  to  enhance 
the  aggregate  employment  in  the  trade. 
But  even  here  the  circumstances  of  each 
trade  must  be  taken  into  account.  While 
labour-saving  machines  and  other  economies 
tend,  in  the  long  run  and  as  regards  the 
general  body  of  the  workers,  to  raise  wages 
without  diminishing  employment,  the  method 
of  their  introduction  under  the  spur  of  com- 
petitive profit-seeking  is  often  truly  detri- 
mental to  special  bodies  of  workers  immedi- 
ately affected;  and  though  the  "long  run" 
may  bring  compensations,  the  narrow  margin 
of  their  lives  and  means  compel  them  to 
safeguard  as  far  as  possible  the  "  short  run." 
Nor  is  the  resistance  of  organized  wage- 
earners  to  rapid  changes  of  method  justifiable 
merely  from  the  standpoint  of  their  imme- 
diate group-interests.  It  is  justifiable  also 
from  the  wider  social-economic  standpoint, 
provided  the  resistance  is  gradually  relaxed. 
For  the  swift  wholesale  changes  which  com- 
petitive profit-seeking  often  prompts,  are 
fraught  with  wider  social  and  industrial 
dangers.  So  far  as  trade-union  opposition 
only  moderates  the  pace  of  these  industrial 
changes,  it  not  merely  serves  its  own  interests, 
but  incidentally  the  social  interest. 

Industrial    laws,    regulating    the    hours    of 
labour    and    other    conditions     in    different 


134    THE  SCIENCE  OF   WEALTH 

trades  to  various  extents,  assist  in  making 
the  scarcity  and  the  organization  of  labour 
more  effective  in  some  trades  than  in  others, 
and  so  in  raising  and  maintaining  the  differ- 
ent levels  of  standard  wages  which  we  find. 
If  there  had  been  no  factory  laws,  no  Acts 
protecting  the  lives  of  workers,  or  discriminat- 
ing age  or  sex  for  purposes  of  employment, 
the  incentives  which  evoked  those  improve- 
ments of  machinery  and  methods  that  de- 
mand higher  qualities  of  skill  and  morale  in 
factory  workers,  would  have  been  far  weaker 
than  they  have  been,  and  the  opportunities, 
of  which  the  higher  grades  of  specialized 
labour  have  availed  themselves  for  organiza- 
tion, would  not  have  existed. 

Thus  we  see  how  a  combination  of  technical 
conditions,  legislation  and  organization,  has 
removed  labour  from  a  common  low  level, 
disposing  it  in  a  series  of  graded  terraces, 
with  rising  standards  of  wages  and  of  com- 
fort. No  modern  treatment  of  the  wages 
question  can  take  labour  as  a  single  market 
amenable  to  some  one  "  iron  law  "  or  other 
simple  formula. 

There  are  many  sorts  of  labour,  each  with 
its  own  market  and  its  own  price,  just  as  we 
saw  there  were  many  markets  for  the  use  of 
land  and  capital.  Though  the  young  raw 
labourer  has  some  choice  of  occupation,  for 
most  workers  this  choice  is  very  restricted 


WAGES  135 

both  as  regards  trade  and  locality.  The 
lower  grades,  requiring  low  skill  and  training, 
are  more  accessible  to  one  another,  so  that  we 
may  speak  of  "  labourers  "  in  towns  as  if 
they  formed  a  single  market  and  had  a  single 
price,  which  indeed  is  substantially  the  case. 
The  same  is  true  of  women's  factory  work 
in  all  but  the  most  highly  skilled  trades. 
The  degree  of  skill  wanted  can  be  acquired 
so  readily  by  most  young  women  that  in 
effect  a  single  market  and  a  single  price  exists. 
The  higher  the  skill  or  quality  of  the  labour, 
the  smaller  the  proportion  of  the  ripening 
wage-earners  able  to  qualify  and  enter  this 
labour-market,  and  the  more  inaccessible  it 
is  to  workers  hitherto  engaged  in  other  sorts 
of  work.  So,  for  skilled  male  labour  there 
exists  a  number  of  very  distinct  labour- 
markets,  protected  against  rushes  from  outside, 
and  so  less  likely  to  be  hampered  by  a  large 
permanent  excess  of  supply.  Wage-earners 
in  this  condition,  being  more  intelligent 
and  better  paid,  are  enabled  to  organize 
themselves  for  bargaining  far  more  effectively 
than  wage-earners  in  the  lower  grades.  So 
they  are  able  to  raise  the  level  of  their  wages 
to  a  larger  extent  than  the  mere  superiority 
of  skill  would  appear  to  warrant.  Because 
a  compositor  may  on  the  average  earn  a  wage 
twice  as  high  as  a  cotton  or  woollen  weaver, 
one  is  not  entitled  to  assume  that  the  work 


136    THE  SCIENCE   OF  WEALTH 

he  does  is  twice  as  skilful.  What  mainly 
determines  the  wage-level  is  the  plenty  or 
scarcity  of  the  supply  of  available  labour  in 
the  trade,  not  the  degree  of  skill  required, 
except  so  far  as  the  latter  condition  affects 
the  former.  As  in  the  use  of  land  and  capital, 
scarcity  of  supply  is  the  direct  determinant 
of  the  price  of  the  various  sorts  of  labour. 
As  in  the  case  of  capital,  so  in  that  of  labour, 
it  is  the  chief  object  of  organization  to  pro- 
cure and  maintain  scarcity  by  making  it 
difficult  for  outside  labour  easily  to  enter  the 
trade,  and  by  restraining  full  freedom  of 
competition  inside  the  trade. 

The  establishment  of  a  number  of  wage- 
levels  for  different  trades  does  not,  of  course, 
signify  that  all  the  workers  in  the  same 
trade  tend  to  earn  the  same  amount  of  money 
in  a  week  or  in  a  year.  As  more  productive 
land  or  capital  gets  higher  rent  or  interest 
than  less  productive  in  the  same  employment, 
so  it  is  usually  the  case  with  labour.  Where 
piece- wages  prevail,  this  is,  of  course,  obvious. 
A  quicker  or  a  better  worker  will  take  in  a  day 
or  a  week  a  larger  sum,  representing  the  larger 
size  of  his  output  or  the  smaller  deduction  for 
faulty  work.  Since  a  quicker  or  better  worker 
gets  more  out  of  a  machine,  he  will  also  often 
get  in  addition  to  the  wage  a  bonus  which 
merely  measures  the  greater  quantity  of 
piece-work  done.  These  differences  of  in- 


WAGES  137 

dividual  earnings  will  vary  very  greatly  in 
accordance  with  the  conditions  of  the  work. 
Where  the  machine  closely  sets  the  pace, 
and  only  those  are  employed  who  are  com- 
petent to  follow  machines  well  speeded  up,  the 
individual  differences  of  earnings  will  not  be 
large.  But  where  pace  is  largely  or  entirely 
a  matter  of  individual  deftness  or  nervous 
energy,  one  worker  at  the  same  piece-rate 
will  often  earn  twice  the  money  that  another 
earns. 

These  individual  differences  of  earnings 
correspond  to  the  difference  of  rent  which 
follow  the  differences  of  fertility  in  acres  of 
land,  or  the  differences  of  interest  which 
follow  different  hundred  pounds  of  capital 
well  or  ill  invested. 

In  every  industry  at  any  given  time  there 
is  some  labour,  as  there  is  some  land  and 
capital,  which  is  only  just  worth  while  employ- 
ing at  the  market  price.  This  labour,  land 
or  capital,  is  said  to  be  "  on  the  margin  "  of 
employment.  When  wheat  prices  in  England 
fell  below  305.  per  quarter  some  years  ago, 
large  tracts  of  poorer  wheat  land  in  Essex 
and  elsewhere  went  out  of  cultivation,  to  be 
brought  under  the  plough  again  when  wheat 
prices  rose,  as  it  became  once  more  worth 
while  buying  these  acres  back  from  pasture. 
So  in  many  manufactories  there  are  machines 
which,  being  somewhat  out  of  date,  are  not 

E  2 


138    THE  SCIENCE  OF  WEALTH 

worked  in  ordinary  times.  But  when  a 
pressure  of  orders  comes  and  good  prices 
prevail,  it  pays  to  bring  these  once  more  into 
operation.  Most  labour  markets  contain, 
though  they  do  not  maintain,  a  similar  re- 
serve of  labour,  somewhat  inferior  to  the 
average  labour  employed  in  ordinary  times, 
but  brought  into  temporary  use  in  periods 
of  booming  trade. 

For  every  industry  that  is  not  a  close 
monopoly  more  land,  labour  and  capital 
is  usually  available  than  is  in  actual  use. 
That  is  to  say,  there  exist  portions  of  the 
factors  which  lie  below  the  present  margin 
of  employment.  This  does  not  necessarily 
mean  that  they  are  not  employed  at  all. 
They  may  be  employed  in  some  other  in- 
dustry. Acres  of  land  not  good  enough  for 
growing  wheat  at  present  wheat  prices 
may  be  used  for  grazing  cattle;  workers  not 
good  enough  for  getting  coal  may  be  employed 
in  agricultural  labour.  But  if  the  price  of 
wheat  makes  it  worth  while,  some  of  this 
pasture  land  will  be  brought  into  arable 
use;  if  the  price  of  coal  impels  the  opening  of 
more  pits,  some  rural  labour  will  be  drafted 
into  coal-mining. 

For  the  higher  price  of  wheat  or  coal  will 
make  it  worth  while  to  use  land  or  labour 
less  productive  than  the  worst  formerly  in 
use,  and  to  pay  a  price  high  enough  to  bring 


WAGES  139 

in  the  necessary  quantity  from  some  other 
employment  if  there  is  not  enough  lying 
unemployed. 

So  we  must  recognize  that  for  every  industry 
employing  land,  capital  and  labour  of  differ- 
ent grades  or  qualities,  there  exists  a  supply 
of  all  these  factors,  either  lying  idle  or  put  to 
some  other  use,  which  is  not  good  enough  at 
the  present  price  that  must  be  paid  to  get 
them,  but  which  will  be  brought  into  the 
industry  if  a  rise  of  prices  of  the  product  of 
the  industry  makes  it  profitable  to  employ 
them.  The  marginal  land,  labour  or  capital 
in  any  trade  will  thus  shift  with  the  more 
or  less  remunerative  condition  of  the  trade. 

This  moving  up  and  down  of  "  margins  " 
in  the  factors  of  production  is  the  actual 
process  by  which  each  trade  feeds  itself  with 
the  increased  quantity  of  labour,  or  capital,  or 
land  it  needs  for  its  growth.  Of  course  some 
of  the  new  land  or  capital  thus  brought  in 
may,  after  it  has  been  acquired,  prove  to  be 
as  productive  as  that  in  former  use.  The 
fact  that  formerly  it  was  below  the  margin, 
in  the  sense  of  not  being  worth  using  at  the 
price,  often  means  that  some  preliminary 
barrier  has  been  overcome.  For  some  land 
below  the  margin  is  more  fertile  than  some 
land  in  use,  but  it  costs  a  good  deal  to  clear 
and  prepare  it.  Some  agricultural  labour 
may  make  excellent  mining  labour  but  will 


140    THE   SCIENCE  OF  WEALTH 

take  time  and  training.  So  it  appears  that 
trades  and  businesses  compete  with  one 
another  not  only  for  the  increased  factors 
of  production  but  for  those  in  use.  This 
competition,  in  fact,  is  the  usual  way  in  which 
the  industrial  system  tries  to  put  the  proper 
quantity  of  land,  capital,  labour  and  ability  in 
the  places  where  each  can  be  most  profitably 
employed.  So  far  as  profitable  employment 
corresponds  with  productive  employment, 
and  only  to  that  extent,  this  competitive 
ordering  of  the  factors  secures  the  maximum 
production  of  wealth.  This  leads  to  a  con- 
sideration of  the  part  played  by  the  business 
man,  the  person  directly  responsible  for 
ordering  the  factors  of  production  for  the 
attainment  of  profit. 


CHAPTER  VIII 

PROFITS 

THE  business  man  directly  engaged  in  organ- 
izing the  processes  of  industry  is  sometimes 
described  as  the  capitalist-employer,  because 
he  owns  or  controls  the  capital  and  hires  the 
labour  in  a  business.  But  it  is  not  as  owner 
of  capital  that  he  here  concerns  us.  For, 
though  the  controller  of  a  modern  business 
may  own  the  whole  or  part  of  the  capital, 
such  possession  is  not  essential  to  him  as 
business  man.  Indeed  in  the  big  organized 
joint-stock  businesses  the  detailed  control  or 
management  is  often  in  the  hands  of  men  who 
own  little  or  none  of  the  capital. 

The  typical  business  man  hires  his  capital 
as  he  hires  his  labour,  paying  the  current  rate 
of  interest  for  it.  His  practice  is  to  buy  the 
use  of  the  labour,  capital  and  land  he  wants 
at  the  lowest  market  prices,  organize  their 
co-operation  in  some  productive  process,  and 
sell  the  products  at  a  price  which  leaves  a 
margin  after  defraying  his  expenses  of  pro- 
duction. This  margin  represents  his  pay- 
Hi 


142     THE   SCIENCE  OF   WEALTH 

ment  (or  his  business  ability.  It  is  usually 
termed  his  "  profit,"  and  we  shall  reserve 
this  word  to  describe  the  payment  for  the 
ability  or  energy  which  he  and  other  business 
men  apply.  But  one  may  as  well  admit  that 
popular  usage  has  given  such  loose  and  shifty 
meanings  to  the  word  as  to  make  its  use  in 
a  scientific  work  very  difficult.  It  is  liable, 
in  the  first  place,  to  be  confused  with  interest, 
for  where  a  business  man  owns  his  own  capital 
he  is  apt  to  include  the  interest  on  that 
capital  in  his  net  profit.  Indeed,  in  the 
book-keeping  of  a  private  business  there  is 
usually  no  attempt  to  distinguish  the  two. 
Or  profit  may  also  include  a  payment  for  the 
risks  to  which  the  capital  is  exposed,  though 
that  should  properly  be  accounted  for  as 
insurance  cost.  Moreover,  managerial  salaries, 
directors'  fees  and  bonuses,  form  part  of  the 
true  net  profit  though  not  usually  included 
in  it.  Finally,  a  good  deal  of  profit  goes  to 
enhance  dividends  in  enterprises  where  the 
terms  on  which  the  capital  was  raised  are 
such  as  enable  the  shareholders  to  benefit 
by  the  skilled  management  or  good  fortune 
of  the  undertaking. 

But  after  due  allowance  is  made  for  these 
irregularities  of  use,  it  will  be  convenient  to 
regard  the  business  men  who  organize  and 
control  the  industrial  processes  as  taking 
in  the  form  of  net  profits  the  margin  that 


PROFITS  143 

remains  after  all  expenses  are  defrayed.  A 
great  variety  of  energy  and  ability  goes  into 
the  work  of  this  business  man.  He  is  respon- 
sible for  planning  the  size  and  structure  of 
the  business,  deciding  what  plant  is  to  be 
used,  what  processes  employed,  and  how 
much  labour  of  different  sorts.  He  next 
must  hire  the  requisite  capital  and  labour, 
organize  its  co-operation  for  the  processes 
of  production,  and  buy  the  proper  sorts  of 
materials  on  favourable  terms :  the  final 
product  he  must  market  advantageously. 
These  processes  of  buying  and  selling,  of 
technical  business  organization,  the  control 
of  labour,  and  the  book-keeping  and  finance, 
require  a  combination  of  sagacity,  know- 
ledge, enterprise,  industry  and  self-command, 
the  virtues  of  the  good  business  man.  Where 
large  quantities  of  other  people's  money  are 
involved,  honesty  and  a  high  sense  of  respon- 
sibility are  important  ingredients  of  the 
business  character.  Much  of  this  work  only 
demands,  however,  a  sort  of  ability  which 
is  tolerably  plentiful  in  any  civilized  country 
where  ordinary  means  of  education  are 
widely  available.  So  a  manager  of  a  mill 
in  a  staple  trade  can  usually  be  selected  from 
an  ample  supply  of  qualified  applicants  at  a 
salary  not  greatly  exceeding  the  wages  of 
foremen  or  skilled  artisans  in  the  best-paid 
processes  of  manual  labour. 


144     THE   SCIENCE  OF  WEALTH 

Although  this  ordinary  work  of  manage- 
ment involves  many  acts  of  judgment  which 
contribute  to  the  success  or  failure  of  the 
business,  it  may  be  regarded  as  tolerably 
routine  in  character,  and  as  distinct  from  the 
critical  plans  and  judgments  formed  by  the 
man  responsible  for  the  general  direction  of 
the  business. 

This  business  man  is  thus  a  link  between 
the  producer  (or  owner  of  a  productive  agent) 
and  the  consumer.  His  work  consists  in 
arranging  and  conducting  the  most  economical 
co-operation  of  various  sorts  of  capital  and 
labour,  and  his  pay,  or  profit,  consists  of  the 
difference  between  the  expenses  of  buying 
the  factors  of  production  and  the  price  he 
can  get  for  the  product.  At  first  sight  it 
may  appear  as  if  he  were  merely  a  mercantile 
middleman,  buying  something  cheap  and 
selling  it  dear.  But  even  among  commercial 
business  men  there  are  few  whose  profitable 
operations  merely  amount  to  this.  For  the 
merchant  organizes  distribution,  gathering 
his  various  goods  from  different  sources, 
selecting  and  arranging  them,  and  placing 
them  at  the  disposal  of  retailers  in  greater 
quantities  and  ampler  choice  than  would  be 
possible  if  each  retailer  had  himself  to  seek 
producers  of  each  article  he  needed  to  stock 
his  shop.  The  middleman  who  thrusts  him- 
self needlessly  and  officiously  between  two 


PROFITS  145 

classes  of  producer,  or  between  producer  and 
consumer,  is  the  exception,  not  the  rule, 
though  it  is  true  that  many  middlemen  con- 
sume their  energy  more  in  competition  with 
one  another  than  in  the  proper  part  which 
belongs  to  them,  the  organization  of  markets. 

But  the  head  of  a  manufacturing  firm, 
the  manager  of  a  railway  or  of  a  mine,  per- 
forms a  more  obviously  productive  operation. 
The  separate  bits  of  capital  and  labour  that 
he  buys  only  attain  their  full  productive 
power  when  they  are  brought  together.  The 
whole  is  more  productive  than  the  mere  sum 
of  the  productive  value  of  the  parts.  A 
worker,  say  a  carpenter  or  shoemaker,  can 
produce  very  little  by  himself,  or  with  such 
tools,  material  and  market  as  he  can  himself 
command  :  only  when  he  is  brought  into  a 
fully  equipped  business,  with  all  the  advan- 
tages of  division  of  labour  and  specialized 
capital,  are  his  energy  and  skill  fully  pro- 
ductive. 

If,  then,  a  business  man  can  buy  his  labour 
at  a  price  which  represents  its  small  pro- 
ductivity as  a  single  unit,  and  sell  the  greatly 
enlarged  product  which  comes  from  using 
it  with  other  units  of  labour  and  of  capital, 
he  will  appear  to  make  an  immense  gain  in 
actual  wealth  which  he  can  take  for  his 
profit. 

This  indeed  is  what  he  tries  to  do,  and,  as 


146    THE  SCIENCE  OF  WEALTH 

\ve  saw,  there  is  a  socialistic  theory  which 
virtually  explains  all  "  surplus "  as  con- 
sisting in  this  sort  of  gain.  But  there  are 
several  considerations  which  prevent  the  full 
acceptance  of  this  explanation  of  "  surplus." 
In  the  first  place,  the  business  man  does  the 
same  thing  with  the  capital  he  uses  in  his 
business.  A  typical  modern  business  requires 
him  to  collect  from  many  different  little  men 
of  capital,  investors,  a  number  of  bits  of 
capital.  Each  of  these  by  itself  is  much  less 
productive  than  when  he  has  organized  it 
into  his  business  structure.  Here,  too,  he 
seems  to  buy  it  at  a  price  measuring  its 
smaller  separate  productivity,  to  make  it 
more  productive  by  combination,  and  to  keep 
to  himself  the  whole  gain,  or  profit,  of  the 
proceeding. 

Thus  there  seems  to  be  a  surplus  value  got 
out  of  capital  corresponding  to  that  got  by 
buying  labour  cheap.  And  it  is  quite  true 
that  profit  may  be  taken  to  consist  of  the 
difference  between  the  smaller  productivity  of 
labour  and  capital  used  in  other  ways  and  the 
larger  productivity  when  applied  to  the 
organized  business  in  question. 

If  a  business  man  could  really  get  and  keep 
for  himself  as  profit  all  the  difference  between 
what  a  worker,  or  £100  of  capital,  could 
produce  "  by  itself  "  and  what  he  or  it  could 
produce  as  a  factor  of  an  organized  business, 


PROFITS  147 

profits  would  swallow  up  the  whole  of  any 
industrial  surplus  that  could  be  found.  But 
no  business  man  can  get  all  this.  For  he  finds 
other  business  men  bent  upon  the  same  object. 
This  competition  checks  profit  in  two  ways. 
The  first  business  man  who  came  among  a 
population  of  small  peasants  and  set  them 
working  in  a  factory  or  mine  would  get  them 
at  a  wage  slightly  exceeding  what  they  could 
earn  each  working  for  himself  upon  the  soil. 
The  aggregate  increase  in  the  product  of  their 
labour  would  be  great,  and  he  would  be  able 
to  keep  nearly  all  of  it  as  profit.  The  early 
"  clothiers  "  and  other  factory  owners  did  in 
fact  get  this  advantage  when  they  exploited 
a  locality  hitherto  untouched  by  the  new 
industry.  But,  as  other  business  men  came 
into  the  same  field,  their  surplus-profit  was 
liable  to  be  cut  into  at  both  ends.  For  our 
clothier  could  no  longer  always  buy  labour 
at  a  price  just  above  the  agricultural  earnings, 
but  found  himself  bidding  against  other 
business  men  trying  to  do  the  same  thing. 
In  order  to  get  the  labour  he  wanted  he  was 
obliged  to  pay  a  wage  slightly  exceeding,  not 
the  agricultural  earnings,  but  the  wage  it 
was  worth  while  another  factory  owner  to 
offer  to  the  peasant.  In  other  words,  when 
his  available  supply  of  raw  labour  was  limited 
and  a  good  many  business  men  were  begin- 
ning to  exploit  it,  its  price  would  rise  so  as 


148     THE   SCIENCE  OF  WEALTH 

to  cause  a  rise  in  the  cost  of  working  the 
factory  or  mine. 

And  what  applies  to  labour  would  in  some 
measure  apply  also  to  capital  and  land.  The 
first-comer  among  the  business  men  would 
evidently  get  the  land  for  building  a  factory, 
or  for  working  minerals,  on  easier  terms  than 
afterwards,  when  other  business  firms  were 
competing  for  the  best  sites  or  the  likeliest 
seams.  So  competition  among  business  men 
in  buying  the  factors  of  production  will  keep 
down  profits  by  raising  expenses.  The  same 
cause  will  cut  down  profits  at  the  other  end, 
by  reducing  the  price  at  which  the  product 
of  the  factory  or  mine  is  marketed.  The 
first-comer  here  again  has  the  pull.  For  he 
not  only  buys  his  labour  and  other  factors 
cheap,  but  he  can  sell  his  product  dear,  so 
long  as  he  remains  alone  in  the  field.  But  as 
the  competition  of  other  business  men  be- 
comes effective  in  the  market  for  his  products, 
as  well  as  in  the  labour  market,  he  finds  his 
handsome  profit,  t.  e.  the  difference  between 
the  low  price  of  the  factors  and  the  high  price 
of  his  product,  cut  down  simultaneously  at 
both  ends.  If  the  competition  becomes  not 
merely  effective  but  intense,  his  profit  may 
be  reduced  to  a  bare  minimum. 

Thus,  as  a  matter  of  mere  theory,  the 
business  man,  as  the  owner  of  a  factor  of 
production,  viz.  business  ability,  appears 


PROFITS  149 

to  be  in  the  same  position  as  the  owner  of 
any  of  the  other  factors.  Scarcity  or  mono- 
poly may  yield  him  a  large  surplus  of  un- 
earned income,  abundance  or  competition 
may  reduce  his  "  profit  "  to  a  minimum  just 
sufficing  to  evoke  the  use  of  his  business 
ability. 

In  practice  profits  vary  so  much  more 
than  wages,  or  interest  or  salaries,  for  the 
same  sort  of  organizing  work  in  the  same 
trades,  that  it  seems  as  if  no  general  state- 
ment could  be  applied  to  them.  In  certain 
trades  some  well-equipped  businesses  will 
be  taking  very  high  rates  of  profit,  others 
very  low.  The  difference  is  commonly  put 
down  to  the  ability  of  direction  and  manage- 
ment. Where  two  manufacturing  businesses, 
two  large  hotels,  two  retail  general  stores, 
are  worked  with  adequate  capital  under  the 
same  external  conditions,  and  one  succeeds 
while  the  other  fails,  it  seems  evident  that 
either  luck  or  skill  of  management  must  explain 
the  difference.  Though  luck  plays  a  larger 
part  in  the  business  world  than  is  sometimes 
supposed,  management  is  commonly  accounted 
the  efficient  cause.  And  this  is  doubtless 
a  true  view.  But  to  jump  from  this  view  to 
the  theory  that  the  creative  power  of  business 
ability  has  brought  into  being  a  great  fund 
of  wealth  which  belongs  to  the  business  man, 
as  the  necessary  reward  of  his  superior 


150     THE   SCIENCE  OF  WEALTH 

mental  energy  and  skill,  fails  to  take  into 
account  the  full  conditions  of  such  business 
success. 

Take  an  illustration  most  favourable  to 
this  superstitious  view  of  human  ability,  the 
case  of  two  equally  well-situated  hotels  or 
shops,  one  of  which  gets  high  profits  while 
the  other  only  just  pays  its  way.  Ability 
of  management  undoubtedly  has  a  great  deal 
to  do  with  the  difference  of  result.  This 
ability  will  operate  in  two  directions.  The 
successful  business  will  be  better  organized, 
i.  e.  the  capital  and  labour  will  be  better  chosen 
and  better  directed.  But  a  little  reflection 
enables  one  to  see  that,  though  the  initiative 
in  this  better  organization  may  proceed  from 
the  ability  of  the  single  manager,  its  efficacy 
depends  upon  the  capacity  of  all  the  various 
employees  for  co-operating  to  carry  out  the 
manager's  directions.  In  other  words,  there 
is  a  sort  of  ability  which  oozes  from  the  whole 
organized  personnel  of  the  business  to  help 
towards  success.  This  cannot  be  ignored, 
it  is  not  merely  a  condition  but  a  joint-agent 
in  the  success.  Every  just-minded  manager 
of  a  successful  business  recognizes  that  a  large 
share  of  his  success  is  due  to  the  co-operation 
of  his  subordinates  or  employees.  Again, 
much  of  the  success  of  the  hotel  or  shop  will 
be  due  to  the  fact  that  it  has  gathered  a  special 
clientele  who  think  they  can  buy  there  some 


PROFITS  151 

quality  of  article  or  some  comfort  or  accom- 
modation which  they  cannot  get  elsewhere. 
This  superiority  is  often  very  slight,  often 
indeed  a  mere  matter  of  form  or  fashion, 
resting  on  no  substantial  basis  of  merit,  but  it 
serves  to  lift  a  business  out  of  the  ruck  of 
competition,  and  secure  it  a  control  of  the 
market. 

The  whole  profit  of  a  successful  business, 
beyond  what  is  really  minimum  wages  of 
ability,  is  a  scarcity  rent  or  surplus,  attribut- 
able, like  every  other  surplus,  to  a  restraint 
upon  free  competition  by  limiting  the  supply 
of  the  factor  of  production  that  receives  the 
surplus.  The  conduct  of  modern  industry 
lends  itself  to  this  scarcity.  For,  though 
there  is  most  likely  a  plentiful  natural  supply 
of  efficient  business  ability  of  various  orders, 
only  a  small  proportion  of  its  owners  can  find 
an  opportunity  of  training  and  applying  it. 
Many  men  of  natural  ability  cannot  get  it 
recognized,  or  cannot  get  the  confidence  of 
men  with  capital  needed  for  their  gift  to 
fructify,  or  they  cannot  find  or  make  a  good 
business  opportunity  for  employing  it.  There 
may  be  thousands  of  men  fitted  by  nature 
to  be  heads  of  a  great  shipping  firm  or  of 
a  banking  company,  but  the  number  of  men 
required  for  such  posts  is  counted  by  tens. 
The  small  number  of  effective  competing 
firms  in  many  of  the  highly-developed  enter- 


152     THE   SCIENCE  OF   WEALTH 

prises  means  that  many  of  the  profitable 
orders  or  contracts  are  not  really  made  the 
subject  of  close  bargaining.  They  pass  to 
one  or  other  of  the  firms  that  has  acquired  a 
special  reputation  for  "  that  class  of  busi- 
ness," or  else  the  competition  of  the  few  firms 
competent  to  undertake  the  work  is  qualified 
by  combination  or  arrangement.  So  a  very 
large  quantity  of  work  is  done  on  terms 
yielding  a  rate  of  profit  far  in  excess  of  what 
would  have  been  got  if  such  competition 
operated  as  prevails  between  rival  grocers 
in  the  same  street. 

The  same  paucity  of  the  number  of  close- 
competing  firms,  of  course,  not  only  raises 
selling  prices  but  lowers  the  price  of  labour 
and  of  free  capital.  For  it  is  evident  that 
labour  can  get  better  terms,  if  there  exists 
a  number  of  keenly  competing  firms  bidding 
for  the  best  supply,  than  if  there  are  only  half- 
a-dozen  whose  profitable  state  stimulates 
them  to  organize  a  strong  employers'  asso- 
ciation. A  general  survey  of  the  industrial 
world  would  perhaps  distinguish  the  trades 
where  close  competition  is  maintained  be- 
tween considerable  numbers  of  standardized 
routine  businesses  from  those  where  each 
business  does  a  more  or  less  separate  class 
of  work  and  has  a  market  that  is  to  some 
extent  its  own.  Both  may  belong  to  great 
capitalist  enterprise,  but  the  ordinary  profits 


PROFITS  153 

of  the  former  will  be  low,  while  many 
businesses  of  the  latter  class  will  be  able  to 
make  great  profits  even  in  the  ordinary 
course  of  trade. 

It  is  probable  that  in  advanced  industrial 
countries,  such  as  Great  Britain  and  the 
United  States,  a  constantly  increasing  share 
of  the  "  surplus  "  figures  as  net  profits  to 
the  successful  "  business  man."  This  state- 
ment is  probably  correct,  even  if  full  allow- 
ance is  made  for  losses  of  unsuccessful  "  busi- 
ness men."  Of  the  aggregate  "  surplus  " 
which  we  term  "  unproductive  "  because  it 
exceeds  the  necessary  inducement  to  apply 
a  factor  of  production,  business  ability  takes 
a  considerably  larger  share  than  land  or 
capital. 

The  justification  of  this  statement  would 
involve  a  more  minute  examination  than  is 
here  possible,  and  it  would  be  necessary  to 
include  under  profits  a  good  deal  that  is  con- 
cealed under  interest  and  rent.  But  it  is 
supported  by  a  general  appeal  to  experi- 
ence. Most  of  the  families  of  evidently 
growing  wealth  have  made  their  wealth  out 
of  "  trade."  By  this  is  meant  that  profits, 
rather  than  rent  or  interest,  constitutes  the 
origin  and  substance  of  their  wealth.  Part  of 
this  wealth  may  reasonably  be  regarded  as 
the  costs  of  ability,  the  remuneration  necessary 
to  evoke  and  encourage  the  larger  quantity  and 


154     THE   SCIENCE  OF  WEALTH 

variety  of  business  skill  which  modern  in- 
dustry requires.  But  a  large  part  will  rank 
with  economic  rent  of  land  and  surplus  interest 
as  "  unproductive  surplus."  The  general 
trend  of  modern  industrial  development  has 
been  to  assign  more  importance,  more  power 
and  more  wealth,  to  the  employing  and  direct- 
ing class.  "  Capitalists,"  as  such,  though 
increasing  in  numbers  and  in  the  amount  of 
capital  they  own,  are  of  relatively  less  im- 
portance. They  have  become  investors,  and 
though  they  take  in  interest  a  large  share  of 
the  whole  product,  their  control  even  of  the 
use  of  the  capital  they  own  is  diminishing 
and  passing  more  and  more  into  the  hands  of 
directors  and  employers. 

But  an  understanding  of  the  modern 
system  would  be  very  imperfect  if  it  did  not 
include  a  special  consideration  of  one  parti- 
cular species  of  "  business  men,"  viz.  those 
concerned  with  the  general  organization  of 
industry  by  means  of  finance.  For  as  the 
ordinary  little  capitalist  is  in  effect  controlled 
by  the  managers  of  the  business  he  has  put 
his  money  in,  so  the  latter  are  in  an  increasing 
measure  the  dependents  and  agents  of  great 
financial  houses. 

The  business  man,  as  such,  is  not  an  in- 
ventor of  new  processes.  The  ability  of  a 
Stevenson,  an  Edison,  a  Siemens,  belongs  to 
a  different  order.  Only  when  it  has  been 


PROFITS  155 

acquired  and  taken  over  by  a  business  man 
does  it  rank  as  industrial  power.  Of  course 
some  inventors  are  also  business  men  and  so 
are  able  to  exploit  industrially  their  genius. 
But  these  are  rare  exceptions.  The  ability 
of  the  business  man  requires,  not  that  he 
should  invent,  but  that  he  should  have  a 
true  eye  for  the  business  value  of  other 
people's  inventions.  This,  in  fact,  should  be 
considered  as  his  first  function  in  an  age 
of  progress.  He  is  the  man  with  an  eye  for 
profitable  notions,  whether  the  notion  be  a 
new  machine,  a  new  product,  a  new  market, 
or  a  new  business  method.  He  will  dis- 
tinguish profitable  from  unprofitable  notions, 
buy  the  former  as  cheaply  as  he  can,  make  or 
adopt  a  business  structure  to  embody  his 
notion,  and  get  his  profit  by  conducting  such 
a  business  or  by  selling  it  to  some  other 
business  man.  Most  of  these  notions  are 
industrially  productive  as  well  as  profitable. 
When  a  mechanical  invention  cheapens  manu- 
facture, or  transport,  or  introduces  a  new 
comfort  or  convenience  of  life,  utilizes  a 
waste  product,  or  opens  up  a  new  market, 
the  inventor  or  series  of  inventors  and  the 
business  man  between  them  have  been  directly 
instrumental  in  causing  an  addition  to  the 
world's  wealth.  Other  notions  equally  pro- 
fitable to  the  business  man  may,  however, 
carry  little  or  no  industrial  productivity. 


156     THE  SCIENCE  OF  WEALTH 

An  artful  mode  of  advertising,  a  cheap  para- 
sitic imitation  of  an  established  article,  a 
skilful  method  of  company  promotion,  may 
be  quite  as  profitable,  though  destitute  of 
any  productivity.  It  may  be  just  as  pro- 
fitable to  get  business  away  from  another 
firm  as  to  establish  a  new  business,  and 
though  upon  the  average  this  success  in  com- 
petition implies  the  substitution  of  a  some- 
what better  or  cheaper  article,  there  are 
many  cases  where  no  such  gain  can  be  as- 
sumed. 

Where  business  ability  is  thus  applied  to 
the  exploitation  of  a  profitable  notion,  that 
exploitation  may  be  achieved  in  a  single 
stroke  or  by  a  longer  business  process.  The 
financial  dealer  in  profitable  notions  pro- 
motes or  reconstructs  a  company,  sometimes 
taking  out  at  once  in  cash,  or  in  shares  which 
he  at  once  "  unloads,"  as  much  as  he  can  of 
the  anticipated  future  profits  of  the  working 
of  the  company.  Sometimes  he  retains  a 
holding  of  shares,  using  them  either  to  earn 
dividends  or  for  profitable  dealing  on  the 
Stock  Exchange.  The  part  played  by  this 
type  of  business  man  is  of  rapidly  growing 
importance  in  modern  industry,  and  the 
proportion  of  the  general  wealth  which  passes 
to  him  as  "  profit  "  is  increasing. 

In  countries  where  joint-stock  enterprise 
is  most  highly  developed,  as  in  Great  Britain 


PROFITS  157 

and  America,  it  is  probably  the  case  that 
three-quarters  of  the  fresh  supply  of  capital 
goes  into  companies  and  pays  heavy  toll  to 
the  financial  organizers.  This  profit,  how- 
ever, though  often  excessive,  is  by  no  means 
all  unearned.  For  under  our  competitive 
system  the  financier  is  an  indispensable* 
being,  and  upon  the  skilled  performance  of 
his  will  the  economical  working  of  the  indus- 
trial system  more  and  more  depends.  Though 
he  is  "  out  for  profit,"  the  work  for  which  he  is 
paid  consists  in  the  direction  of  the  new  supply 
of  industrial  energy  to  the  places  where  it  is 
wanted  for  the  growth  of  the  industrial  sys- 
tem. For  the  money  or  paper  values,  with 
which  financiers  seem  to  be  exclusively  con- 
cerned, are  the  machinery  by  which  not  only 
real  capital  but  labour  and  business  ability 
are  drawn  to  the  industrial  points  where  they 
can  be  productively  applied.  The  floating 
of  a  bogus  rubber  company,  by  which  in- 
vestors are  duped  into  entrusting  their  sav- 
ings to  financial  sharpers  who  use  them  for 
their  private  purposes,  is  the  exception  not 
the  rule.  The  proper  work  of  the  financier 
is  to  cause  money-savings  to  take  shape  in 
steam  engines  and  steel  rails  for  a  Canadian 
railway,  dynamos  for  some  electric-power 
company,  spinning-frames  and  factory  build- 
ings for  a  textile  company,  and  to  draw 
from  the  general  supply  of  labour  a  sufficient 


158     THE  SCIENCE  OF  WEALTH 

number  of  the  right  sort  of  workers  to  co- 
operate with  these  various  sorts  of  plant. 

Now  that  a  larger  and  larger  number  of 
the  staple  trades  are  passing  under  joint- 
stock  enterprise,  while  the  apparatus  for 
gathering  and  conveying  capital  .and  labour 
is  becoming  more  complex  and  more  wide- 
spread, it  follows  that  the  work  of  financial 
direction  grows  more  delicate  and  more  im- 
portant. Firms  like  J.  P.  Morgan's,  Roth- 
schild's, and  the  like,  are  engaged  in  directing 
the  flow  of  immense  streams  of  new  indus- 
trial energy  to  various  parts  of  the  earth,  for 
the  making  of  roads,  the  discovery  and 
development  of  mining  and  agricultural  re- 
sources, and  for  the  construction  of  various 
sorts  of  machinery  and  plant.  Along  with 
this  productive  work  there  goes  a  good  deal 
of  obstructive  or  destructive  work,  some  of 
which  is  equally  profitable  to  financiers. 
But  the  difficulty  of  disentangling  the  socially 
useful  from  the  useless  or  noxious  operations 
must  not  lead  us  to  question  the  great  im- 
portance that  attaches  to  finance  as  a  genu- 
inely productive  agency.  Under  a  different 
social-industrial  system  much  of  this  work 
might  be  dispensed  with  or  done  otherwise, 
but,  as  matters  actually  stand,  the  work  of 
the  financier  is  of  immense  value  and  must 
like  other  work  be  paid  what  is  necessary 
to  get  it  done  efficiently. 


PROFITS  159 

This  does  not,  however,  imply  that  the 
profits  taken  by  financiers  are  an  accurate 
measure  of  the  services  they  render  or  a 
minimum  inducement  to  their  rendering.  On 
the  contrary,  there  is  no  sort  of  work  more 
likely  to  be  overpaid.  For  the  nature  of 
these  financial  services  frequently  excludes 
effective  competition.  The  floating  of  loans 
or  the  financing  of  big  companies  can  only  be 
undertaken  by  a  few  great  houses  or  groups, 
and  the  conditions  of  close  bargaining,  so  as 
to  drive  the  profits  to  a  minimum,  seldom 
exist.  There  is  no  market  price  for  such 
work  :  it  is  a  matter  of  special  opportunities 
and  special  terms.  The  secrecy  or  semi-secrecy 
which  enshrouds  many  of  these  financial 
operations  also  favours  excessive  payment. 
There  can,  therefore,  be  no  question  but  that 
the  profits  of  this  class  of  business  contain  a 
larger  proportion  of  unearned  or  unnecessary 
income  than  any  other  sort  of  profit. 

It  will  be  convenient  here  to  present  a 
summary  of  the  results  of  the  inquiry,  made 
in  this  and  the  three  preceding  chapters,  into 
the  respective  claims  made  by  land,  labour, 
capital,  and  ability  upon  the  industrial  pro- 
duct, and  into  the  methods  of  enforcing  these 
claims.  The  common  interest  of  all  parties 
concerned  requires  that  out  of  the  product, 
or  income,  as  it  is  produced,  proper  provision 


160     THE  SCIENCE  OF   WEALTH 

should  be  made  for  the  maintenance  of  e£ 
factor  needed  to  carry  on  the  process  of 
production.  Where  anything  is  taken  out 
of  the  land  in  the  way  of  fertility  of  soil  or 
other  natural  powers,  it  must,  where  possible, 
be  restored  :  the  land  must  not  be  let  down. 
Proper  provision  must  be  made  for  wear  and 
damage  to  buildings,  machinery  and  other 
instruments,  and  for  the  risk  of  having  to 
replace  them  by  better  sorts  of  instruments. 
Along  with  these  depreciation  and  insurance 
funds  for  land  and  capital  must  be  placed 
such  part  of  the  wages  of  labour  and  ability 
as  goes  to  maintain  the  various  sorts  of  pro- 
ductive human  powers  required  to  continue 
the  work  of  production.  A  part  of  wages  and 
salaries  will  thus  be  classed  not  with  rent 
and  interest  but  with  "  wear  and  tear  "  pro- 
vision. 

These  are  all  the  payments  necessary  to 
secure  the  existence  and  continued  operation 
of  the  industrial  system  as  it  stands.  In 
a  primitive  industrial  society  they  might 
exhaust  the  product,  but  under  modern 
conditions  the  co-operation  of  the  factors 
yields  a  product  far  in  excess  of  what  is  needed 
for  mere  maintenance.  This  excess  or  "  sur- 
plus "  may  be  used  to  feed  the  growth  of  the 
industrial  system  by  a  properly  apportioned 
distribution,  or  it  may  go  as  wasteful  over- 
payment to  the  owners  of  any  factor  strong 


PROFITS  161 

enough  to  take  it.  A  large  part  of  the  sur- 
plus does  go  in  the  shape  of  minimum  interest 
and  profit,  and  wages  of  progressive  efficiency, 
to  evoke  larger  and  better  supplies  of  the 
various  sorts  of  capital,  ability  and  labour, 
required  in  a  progressive  industrial  society. 
The  state,  too,  requires  and  obtains  similar 
allowances  for  maintenance  and  growth, 
obtained  by  payments  made  out  of  the  indus- 
trial product  which  the  public  services  have 
assisted  to  produce. 

The  whole  of  the  industrial  product,  the 
general  income,  could  advantageously  be 
applied  to  these  purposes  of  providing  for 
the  maintenance  and  proportionate  growth 
of  the  factors  of  production.  But  it  is  evi- 
dent that  the  whole  of  the  surplus  need  not 
be,  and  in  fact  is  not,  so  applied.  Much  of 
it  is  paid,  not  as  provision  for  maintenance 
or  growth,  but  in  excess  of  what  is  necessary 
for  these  purposes.  Going  to  landowners  as 
rent,  to  capitalists  as  excessive  dividends,  to 
business  men  as  excessive  profit,  sometimes 
to  workers  as  excessive  wages,  it  retards 
industrial  progress.  It  takes  portions  of 
wealth  which  might  have  been  applied  to 
promote  industrial  growth  and  pays  them  as 
"  unearned  income  "  to  persons  who  thereby 
not  merely  are  not  induced  to  increase  their 
output  of  personal  energy  but  are  enabled  and 
induced  to  diminish  or  withhold  such  pro- 
F 


162     THE  SCIENCE  OF  WEALTH 

ductive  energy  as  they  might  otherwise  have 
given  out.  For  all  unproductive  surplus 
acts  as  an  endowment  of  idleness. 

This  "  unproductive  surplus,"  whether  ob- 
tained by  owners  of  land,  capital,  ability  or 
labour,  is  obtained  in  the  same  way,  viz.  by 
establishing  a  shortage  in  that  factor  and 
rackrenting  the  owners  of  the  other  factors. 
A  natural  or  contrived  monopoly  or  scarcity 
is  the  origin  of  every  overpayment.  It  is 
manifestly  false  to  attribute  to  one  of  the 
factors  the  sole  power  to  take  this  surplus. 
Neither  the  landlord,  nor  the  employer,  nor 
the  capitalist,  possesses  this  exclusive  privi- 
lege. Sometimes  one,  sometimes  the  other, 
finds  or  makes  his  factor  "  scarce  "  and  gets 
a  "  pull "  proportionate  to  that  scarcity. 
In  thickly  populated  countries  the  land- 
owner takes  a  large  share  of  this  unproduc- 
tive surplus  in  rising  site-values  and  in  agricul- 
tural and  mining  rents,  except  so  far  as  easy 
and  cheap  access  to  large  external  supplies 
of  foods  and  other  materials  qualifies  his  pull. 
In  sheltered  industries,  where  the  possession 
of  some  natural  or  organized  advantage  gives 
certain  capitalists  the  power  to  keep  out 
"  free "  capital  and  to  restrain  free  com- 
petition, capital  may  take  its  "  pull  "  in  high 
dividends  and  business  men  in  high  profits. 
Since  such  shelter  and  the  scarcity  it  brings 
are  usually  achieved  by  the  genius,  skill, 


PROFITS  163 

industry  or  luck,  of  business  men,  the  pro- 
portion of  such  industrial  gains  which  rightly 
ranks  as  profit  is  probably  much  larger  than 
that  which  ranks  as  interest.  A  conjunction 
of  trade-unionism  and  favouring  circum- 
stances occasionally  gives  a  group  of  wage- 
earners  a  short-lived  pull,  enabling  them  to 
secure  some  unproductive  surplus  in  their 
wages.  In  every  case  this  unearned  and 
unproductive  surplus  is  the  result  of  a  natural 
or  contrived  shortage  of  one  factor  of  pro- 
duction in  relation  to  the  others  whose  co- 
operation is  required  for  the  production  of 
some  sort  of  wealth. 


CHAPTER  IX 

EXCHANGE   AND    PRICES 

WE  are  now  in  a  position  to  understand 
why  a  ton  of  kitchen  coals  in  London  may  be 
bought  for  the  same  sum  as  will  buy  a  pair  of 
medium  quality  blankets,  a  britannia  metal  tea- 
pot, half-a-dozen  cotton  shirts,  or  forty  loaves 
of  bread.  If  each  of  these  purchases  can  be 
made  for  a  sovereign,  it  is  because  the  various 
expenses  of  production,  the  payments  to  the 
owners  of  the  different  productive  agents  in 
the  successive  processes  through  which  each 
of  the  articles  has  passed  happen  to  add  up 
to  this  same  amount.  In  each  case  the 
sovereign  contains  a  great  number  of  little 
bits  of  price  paid  for  the  labour,  ability,  use 
of  capital  and  land  in  the  farming,  mining, 
manufacturing,  transport,  distributive  busi- 
nesses, required  to  produce  and  put  on  to  the 
market  the  ton  of  coals,  the  blankets,  the  tea- 
pot, shirts  and  loaves.  If  we  traced  each 
from  its  earliest  stage  and  followed  the  raw 
materials  as  they  moved  through  these  pro- 
cesses, we  should  see  the  aggregate  expenses 

164 


EXCHANGE  AND   PRICES         165 

mounting  up  until  the  retailer's  profit  com- 
pleted the  amount.  At  any  of  these  stages 
we  should  find  that  the  total  expense  of  the 
productive  process  consisted  of  a  variety  of 
little  expenses  for  the  different  sorts  of  labour, 
capital,  land,  ability  required,  some  of  these 
expenses  bearing  minimum  or  "  free  competi- 
tion "  costs,  others  being  loaded  with  some 
"  surplus "  representing  the  monopoly  or 
scarcity  of  some  one  or  other  factor.  The 
different  articles  selling  for  a  sovereign  will 
not  by  any  means  be  composed  of  costs  and 
surplus  in  the  same  proportions.  It  might 
be  the  case  that  the  205.  paid  for  a  pair  of 
blankets  contained  only  4s.  or  20  per  cent,  of 
surplus  (little  rent  or  surplus  profits  being 
involved),  whereas  the  205.  paid  for  the  loaves 
might  be  loaded  with  85.  or  40  per  cent.,  the 
rent  of  wheat  land,  a  corner  of  wheat,  a 
millers'  or  a  bakers'  combine,  going  to  swell 
the  final  sum.  It  would  require  a  special 
study  of  the  history  of  each  commodity  to 
enable  us  to  say  how  much  of  the  final  price 
the  consumer  had  to  pay  for  it  was  "  cost  " 
and  how  much  "  surplus,"  or  again,  taking 
the  surplus,  how  much  of  it 'was  productive, 
making  for  industrial  growth,  how  much 
unproductive,  i.e.  wasteful  or  detrimental. 

It  has  been  sometimes  held  that  "  rents  " 
and  other  surplus  do  not  enter  into  and 
increase  the  final  price  of  commodities,  that 


166     THE   SCIENCE   OF   WEALTH 

they  are  only  extra  payments  which  owners 
of  particularly  advantageous  land  or  capital 
can  get.  But  our  analysis,  which  identifies 
a  "  surplus  "  with  a  shortage  and  an  enhanced 
price  of  the  entire  supply  of  some  sort  of  land, 
capital,etc.,required  in  a  process  of  production, 
disposes  of  this  objection.  For  where  there 
is  a  natural  or  contrived  scarcity  of  any 
supply  of  productive  power,  the  whole  of  that 
supply,  whatever  sort  of  standard  measure 
is  applied  to  it,  rises  in  price.  If  hop-land 
is  short  in  supply  the  price  of  hops  will 
register  that  shortage.  The  fact  that  some 
acres  of  hop-land  are  better  than  others, 
and  that  the  worst  acres  may  get  little  more 
rent  than  they  could  get  for  growing  wheat, 
does  not  affect  the  fact  that  the  "  scarcity  " 
of  hop-growing  land  raises  hop  prices.  Of 
course  what  is  called  the  "  differential  "  rent, 
measuring  the  difference  between  the  hop- 
growing  power  of  a  good  and  a  bad  acre,  does 
not  enter  or  affect  the  price.  Why  should  it  ? 
The  price,  like  every  price,  is  paid  for  a  given 
quantity  of  commodity  or  service.  If  one 
acre  gives  out  twice  as  much  of  this  productive 
service  as  another,  of  course  it  is  paid  twice 
as  much  in  rent.  This  has  nothing  to  do 
with  the  "  surplus  "  or  "  scarcity  "  element 
that  enters  into  the  price  of  a  unit  of  hop- 
growing  power. 
Or,  if  oil  or  steel  rails  fall  under  a  combine 


EXCHANGE   AND   PRICES         167 

or  other  business  arrangement,  limiting  the 
number  of  wells  or  mills  allowed  to  work, 
and  restricting  the  market  supply  of  oil  or 
rails,  this  scarcity  will  raise  the  price  of  all 
the  oil  or  all  the  rails,  that  produced  by  the 
worst  wells  or  the  most  inefficient  plant 
equally  with  that  produced  by  the  best  wells 
or  the  most  efficient  plant.  The  real  profits 
made  by  the  worst  wells  or  mills  will,  of  course, 
be  lower  than  those  made  by  the  best,  but 
only  because  they  give  out  a  smaller  quantity 
or  a  worse  quality  of  output  in  a  given  time. 

All  the  sorts  of  surplus  which  we  have 
traced,  taken  by  landowners,  capitalists, 
employers,  etc.,  in  any  process,  extractive, 
manufacturing,  transport,  commercial,  pro- 
fessional, financial,  go  to  enhance  the  final 
price  of  the  commodities  purchased  by  con- 
sumers. 

If  there  were  absolutely  "  free  competi- 
tion "  everywhere  and  equal  abundance  of 
all  the  factors  of  production,  all  prices  would 
stand  equally  at  a  minimum,  and  all  goods 
and  services  would  exchange  according  to 
the  sum  of  their  "  costs."  Our  blankets, 
teapot,  shirts,  bread  and  coal,  unloaded  of 
all  their  composite  surplus,  would,  of  course, 
no  longer  sell  for  a  sovereign  each,  but  at 
various  lower  levels.  Some  writers  in  Political 
Economy  construct  a  theory  which  assumes 
this  freedom  of  competition  and  this  com- 


168     THE  SCIENCE  OF  WEALTH 

plete  fluidity  to  exist,  and  then  make  allow- 
ances for  "  friction  "  or  exceptions.  But  this, 
as  Ruskin  pointed  out,  is  like  starting  the 
study  of  human  anatomy  on  the  supposition 
that  the  body  is  absolutely  elastic  and  after- 
wards making  allowances  for  its  actual 
inelasticity.  Scarcity  and  combination  are 
as  real  and  as  normal  features  of  the  actual 
situation  of  our  industry  as  are  competition 
and  abundance.  In  fact  it  is  impossible  to 
give  any  intelligible  account  of  the  working 
of  the  system  without  a  doctrine  of  shortages 
and  surpluses. 

In  our  explanation  of  Markets  and  Exchange 
a  clear  comprehension  of  this  fact  is  essential. 
Goods  and  services  exchange  against  one 
another  in  proportion  to  their  expenses  of 
production  or  loaded  costs,  not  in  proportion 
to  the  quantity  of  labour-time  they  contain, 
or  any  other  measure  of  "  natural  "  costs 
of  production. 

The  price,  and  therefore  the  expenses  of 
production,  of  every  portion  of  a  supply  of 
goods  are  the  same.  But  the  costs  of  each 
portion  are  not  the  same.  The  "  costs  "  of 
growing  a  quarter  of  wheat  are  less  in  a  fertile 
field  than  in  an  infertile  one  :  the  "  costs  " 
of  producing  1,000  tons  of  steel  are  less  in  a 
well-equipped  than  in  an  ill-equipped  works. 
Since  "  costs  "  plus  surplus  compose  expenses, 
this  implies  that  the  surplus  element  in 


EXCHANGE   AND   PRICES         169 

expenses  and  supply  price  varies,  being 
biggest  in  the  best  type  of  business  (farm, 
factory,  mine,  etc.),  smallest  in  the  worst. 
If  one  took  account  of  all  the  farms  growing 
wheat  for  a  particular  market,  one  might 
find  a  farm  which  it  only  just  paid  to  put  to 
wheat-growing.  That  means  that,  in  the 
co-operation  of  land,  labour  and  capital 
which  went  to  the  raising  of  a  quarter  of 
wheat  upon  this  farm,  more  productive  power 
of  labour  and  capital  had  to  be  bought  to 
make  up  for  the  smaller  quantity  of  land- 
power  which  was  available.  The  same  ex- 
penses of  wheat-growing  per  quarter  were 
incurred  in  this  farm  as  upon  the  better 
farms,  but  a  larger  proportion  of  the  sum 
went  as  "  costs  "  in  paying  capital  and  labour, 
a  smaller  proportion  as  "  surplus  "  in  paying 
land. 

Similarly  in  the  case  of  steel  rails.  Here 
the  worst  plant  in  the  industry  corresponds 
with  the  poorest  wheat-farm.  A  larger  pro- 
portion of  the  price  per  ton  for  steel  rails 
will  go  for  wear  and  tear  and  maintenance 
of  capital  and  labour  in  the  worst  establish- 
ments, "  profit "  standing  at  a  minimum. 
In  fact,  the  "  expenses  "  of  a  ton,  represented 
by  its  price,  say  305.,  will  be  virtually  absorbed 
in  these  necessary  costs,  leaving  no  surplus 
interest  for  investors  or  profits  for  the  entre- 
preneur. 
F  2 


170     THE   SCIENCE   OF  WEALTH 

But  if  there  are  some  farms  contributing 
to  the  supply  of  wheat  which  only  just 
remunerate  the  capital  and  labour,  leaving 
no  surplus  for  rent,  how  can  it  be  said  that 
rent  enters  into  price,  enhancing  it  ?  If 
some  establishments  contributing  to  the  supply 
of  steel  rails  only  just  pay  their  way  and  yield 
no  surplus  profits,  how  can  it  be  said  that 
there  is  any  surplus  element  in  the  expenses 
and  the  price  of  steel  rails  ?  The  answer  is 
that  the  scarcity  of  good  wheat-lands  is  the 
cause  of  the  high  average  expense  of  raising 
a  quarter  of  wheat,  enabling  landowners  to 
charge  a  high  price  for  the  fertility  of  Nature 
and  loading  the  "  costs  "  of  labour  and 
capital  with  this  surplus.  The  fact  that 
some  land  used  is  so  infertile  that  Nature 
contributes  very  little  to  the  production  of 
a  quarter  of  wheat,  labour  and  capital  doing 
nearly  all  the  work,  does  not  affect  the  argu- 
ment. If  there  had  been  plenty  of  fertile 
land  available,  the  surplus  (rent)  would  be 
very  little,  and  the  expense  and  price  per 
quarter  would  be  so  much  lower. 

It  is  this  scarcity  of  better  land  that  brings 
worse  land  into  use,  by  loading  expenses  of 
wheat  raising  and  prices  with  so  large  a  surplus 
that  capital  and  labour  can  be  employed  re- 
muneratively upon  some  poor  land. 

Similarly,  the  scarcity  of  well  -  equipped 
steel-mills  causes  the  average  expense  of 


EXCHANGE   AND   PRICES         171 

producing  steel  rails  to  be  higher  than  it 
would  be  if  there  were  an  abundance  of  such 
mills,  and  by  the  high  prices  resulting  from, 
this  scarcity  a  few  worse-equipped  mills  are 
enabled  to  survive  and  just  pay  their  way. 
The  well-equipped  mills  will  sell  rails  at  a 
high  profit,  the  ill -equipped  mills  will  only 
cover  costs.  But  all  the  same,  the  surplus 
profit  which  the  scarcity  of  best  plant  enables 
the  well-equipped  mills  to  earn  is  represented 
in  and  is  got  out  of  the  high  expenses  and 
price  of  rails  :  it  is  these  prices,  thus  deter- 
mined, that  enable  the  few  backward  mills 
to  keep  on  working. 

This  argument  means  that  supply  prices 
are  not  determined,  as  has  sometimes  been 
contended,  by  the  costs  of  production  of 
the  most  costly  portion  of  the  supply,  i.  e.  the 
wheat  produced  in  the  worst  land,  and  the 
rails  turned  out  by  the  worst-equipped  mills. 
This  "  marginal  "  land,  as  it  is  called,  and 
these  "  marginal  "  mills  are  made  just  worth 
working  by  the  fact  that  the  scarcity  of  better 
land  and  better  plant  has  loaded  the  expenses 
and  the  supply  price  with  a  surplus  measuring 
the  degree  of  that  scarcity.  Discover  a  new 
large  rich  wheat  country,  most  of  this  surplus 
or  "  rent  "  that  has  entered  into  expenses 
and  raised  prices  of  wheat  will  evaporate, 
and  with  the  fall  of  prices  the  bad  wheat-land 
will  pass  out  of  use.  Set  up  a  lot  of  new 


172     THE  SCIENCE   OF  WEALTH 

well-equipped  steel  plants,  the  scarcity  value 
of  the  existing  plants  will  collapse,  profits 
and  prices  will  fall,  and  the  ill-equipped  or 
"  marginal  "  mills  will  be  driven  out  of  use. 

Expenses  of  production  and  prices  of  supply 
are  not,  then,  determined  by  the  worst  or 
most  costly  businesses,  but  by  the  ordinary 
standard  business.  In  most  staple  manu- 
facturing industries  the  vast  bulk  of  the 
production  is  done  by  establishments  of 
approximately  equal  equipment.  Almost  all 
the  mills  or  factories  in  a  trade  will  have 
up-to-date  machinery  and  methods,  and  will 
tend  towards  a  common  size  or  pattern. 

In  competitive  trade,  in  order  to  hold  its 
own,  a  business  must  enjoy  the  same  advan- 
tages as  its  competitors  in  buying  its  materials, 
in  working  them  up  and  in  selling  the  product. 
So  in  each  of  the  staple  textile  or  metal 
industries  there  emerge  from  competition 
one  or  two  types  and  sizes  of  business  more 
effective  and  economical  than  any  others,  and, 
since  all  the  new  capital  put  into  the  trade 
runs  into  those  shapes,  they  may  be  taken 
as  representative  firms.  It  is  the  expenses 
of  production  in  these  representative  firms, 
which  do  the  bulk  of  the  trade,  that  deter- 
mine the  supply  prices  of  the  goods.  There 
may  be  a  few  firms  in  the  trade  enjoying  some 
special  advantages  or  economies  in  the  shape 
of  patents  or  secret  processes  or  management, 


EXCHANGE   AND   PRICES        173 

and  so  able  to  produce  a  little  better  or  more 
cheaply  than  the  representative  type.  There 
may  also  be  a  few  firms  of  backward  or 
obsolete  type,  with  old-fashioned  machinery 
or  methods,  struggling  for  their  life  and 
doomed  to  early  extinction,  unless  they  can 
be  reconstructed  and  brought  up  to  date. 
But  these  few  superior  and  inferior  firms  will 
not  appreciably  affect  expenses  ;and  prices. 
The  representative  firms,  producing,  say, 
90  per  cent,  or  more  of  the  total  supply,  will 
regulate  the  prices.  Superior  firms  will  thrive 
upon  these  prices,  enjoying  high  profits : 
inferior  firms  will  starve  upon  them.  When 
it  is  said  that  yarn  or  cotton  cloth  of  a  particu- 
lar quality  costs  so  much  to  produce,  or  that 
steel  rails,  rolled  desks,  wine-bottles,  etc., 
can  be  turned  out  at  such  and  such  a  price, 
it  implies  a  reference  not  to  the  best  and  most 
prosperous  business  in  the  trade,  nor  to  the 
inferior  firm  that  barely  pays  its  way,  but 
to  the  normally  efficient  business. 

There  will,  of  course,  be  many  trades  where 
the  variety  of  products  and  of  processes  is 
so  great,  and  the  changes  of  method  so  refined 
and  numerous,  that  it  will  be  difficult  to  find 
a  standard  type.  In  such  trades  as  the 
chemical,  electrical  apparatus,  motor  car, 
there  will  be  many  sorts  of  product  enjoying 
special  markets  within  the  general  market, 
and  produced  by  businesses  which  are  under- 


174     THE  SCIENCE  OF  WEALTH 

going  transformations.  But  though  here  it 
may  not  be  possible  to  point  to  any  single  or 
few  normal  business  types,  it  will  none  the 
less  be  the  case  that  expenses  and  supply 
prices  for  these  classes  of  goods  will  be  deter- 
mined by  the  representative  rather  than  by 
the  exceptional  business.  The  price  of  chemi- 
cals, electric  lamps,  motor  cars,  will  be  based 
upon  the  expenses  and  the  competition  of 
ordinary,  big,  well-equipped  businesses. 

Even  in  agriculture,  where  the  variety  in 
size  and  sorts  of  businesses  seems  illimitable, 
the  same  principle  holds  good.  When  an 
English  farmer  tells  us  that  wheat  cannot  be 
grown  at  a  profit  when  the  price  is  under  30s. 
a  quarter,  he  means  that  a  good-sized  farm 
employing  modern  machinery  and  with  rea- 
sonably good  management  and  labour  in  an 
ordinary  season  will  make  a  living  profit  for 
himself  by  growing  wheat  for  sale  at  this 
price.  There  will,  of  course,  be  farms  with 
special  advantages  that  will  make  a  bigger 
margin  of  surplus  out  of  wheat  at  such  a 
price ;  other  farms  will  still  be  unable  to  make 
it  pay.  The  normal  farm,  in  size,  equipment, 
working,  management,  is  always  in  the 
farmer's  eye  when  he  says  that  farming  can 
or  cannot  pay  with  wheat  at  such  a  price, 
although  he  may  not  be  prepared  to  explain 
exactly  how  he  arrives  at  this  normal  farm. 
When  one  comes  to  special  sorts  of  farming, 


EXCHANGE  AND   PRICES         175 

such  as  fruit-growing,  poultry-farming,  etc., 
the  business  type  becomes  more  clearly 
marked,  although  a  great  variety  of  ordinary 
farms  may  also  contribute  to  the  supply. 

So  far  as  capital  and  labour  are  able  freely 
to  enter  any  trade  and  compete  for  business, 
this  competition  will  tend  to  select  one  or  a 
few  best  types  of  business  into  whose  hands 
will  fall  the  bulk  of  the  trade,  and  which  will 
determine  the  ordinary  expenses  of  production 
and  the  supply  prices  in  the  markets.  If 
competition  in  these  trades  yields  to  combina- 
tion, and  trade  agreements,  pools,  or  trusts 
come  in,  it  will  still  be  these  representative 
businesses  that  will  determine  prices,  so  long 
as  the  bulk  of  the  supply  remains  in  their 
hands.  By  restricting  output  they  may 
raise  "  expenses  "  so  as  to  include  a  large 
surplus-profit.  But  it  is  they  who  will 
regulate  the  market  prices,  not  the  starving 
independent  firms  outside  the  ring.  These 
latter  will  usually  "  accept "  the  "  ring " 
prices,  making  what  they  can  out  of  them. 
So  when  the  Standard  Oil  Trust  raises  the 
price  of  oil  per  gallon,  or  the  Sewing  Cotton 
Trust  the  price  of  thread,  small  outside 
producers  generally  raise  their  prices  too, 
instead  of  exposing  themselves  to  danger 
by  under-cutting.  As  trade  information  be- 
comes more  rapid  and  exact,  reaching  a 
larger  number  of  producer*,  the  standard  iz%- 


176     THE   SCIENCE   OF  WEALTH 

tion  of  sizes  and  methods  of  production  gains 
ground,  and  the  number  of  competing  busi- 
nesses which  vary  from  the  approved  models 
becomes  smaller.  Of  course  it  will  always 
remain  true  that  exceptional  ability  and 
management  or  some  special  advantage  in 
patents,  access  to  raw  materials  or  markets, 
will  enable  some  particular  firm  or  group  to 
suck  high  profits  out  of  the  ordinary  market 
price  determined  by  their  representative 
competitors. 

If.  however,  these  exceptional  firms  use  their 
full  business  opportunities,  they  will  gradually 
acquire  a  larger  proportion  of  the  trades. 
For,  combining  with  strong  trade  rivals,  they 
will  force  weaker  ones  to  come  in  upon  their 
own  terms,  or  will  crush  them.  When  by 
these  means  they  have  formed  a  combination 
strong  enough  to  enlarge  or  contract  the 
whole  supply  of  the  market  as  they  desire, 
they  can  fix  selling  prices  so  as  to  load  costs  of 
production  with  a  large  monopoly  or  surplus 
element.  They  do  not,  we  repeat,  need  to 
absorb  the  whole  trade  in  order  to  possess 
this  power.  A  "  trust,"  producing  50  or 
60  per  cent,  of  the  supply,  may  sufficiently 
control  output  and  prices,  provided  the 
outsiders  are  small  and  uncombined.  Even 
if  in  some  sections  of  its  market  there  is 
effective  competition  at  lower  prices,  other 
sections  may  yield  monopoly  conditions. 


EXCHANGE  AND   PRICES         177 

The  economic  origin  and  supports  of  such 
trusts,  combinations  and  agreements  are 
familiar.  Sometimes  they  are  rooted  in 
access  to  the  best,  largest  or  cheapest  supply 
of  raw  materials  or  power.  Such  is  the  basis 
of  the  De  Beer's  diamond  trust,  and  the 
United  States  Steel  Corporation  derives  much 
strength  from  possession  of  superior  ore  and 
coal.  Sometimes  railroad  or  other  facilities 
of  transport  enable  them  to  market  their 
goods  more  cheaply  than  competitors.  Such 
was  the  historic  origin  of  the  Standard  Oil 
Company.  Sometimes  the  possession  of 
public  favour  or  privileges,  in  the  shape  of 
tariff  aid,  public  contracts,  licences  or  charters 
of  monopoly,  is  the  main  source  of  strength. 
Many  companies  for  local  services,  e.  g.  gas, 
water,  tramways,  electric  lighting,  etc.,  come 
into  this  class.  Large  size  of  capital,  reputa- 
tion and  special  knowledge,  have  in  certain 
instances  enabled  businesses  to  attain  local 
or  even  wider  control  of  markets.  Perhaps 
the  most  conspicuous  example  of  businesses 
enjoying  high  profits  from  this  source  is 
afforded  by  the  present  state  of  banking  in 
Great  Britain. 

There  is  a  popular  notion  that  in  an  age 
of  capitalism,  since  the  larger  business  in  a 
trade  is  always  economically  stronger  and 
more  profitable  than  the  smaller,  it  is  only  a 
question  of  time  for  the  whole  trade  to  pass 


178    THE  SCIENCE  OF   WEALTH 

into  the  hands  of  a  few  monster  firms  which, 
after  trying  to  slaughter  one  another,  will 
end  by  combining.  Thus  it  is  conceived 
will  competition  work  itself  out  in  all  the 
industries,  leaving  a  single  trust  or  combine 
in  complete  control  of  the  market,  and  able 
to  dictate  prices  to  the  consumer.  In  a  good 
many  industries  the  modern  development  of 
business  life  seems  to  sustain  this  view. 
Modern  machinery  of  manufacture  and  of 
transport  and  modern  credit  have  in  many 
trades  made  the  survival  of  small  businesses 
impossible,  and  have  handed  over  the  industry 
to  a  few  giant  companies.  An  increasing 
number  of  trades  appear  to  be  going  this  way, 
both  in  the  staple  manufactures,  transport, 
mining,  commerce  and  finance. 

But  for  all  that  the  generalization  is  unsound. 
A  large  proportion  of  industry  does  not 
exhibit  this  tendency  towards  concentration. 
Even  in  the  textile  and  metal  industries  large 
numbers  of  little  businesses  survive.  Some  of 
them,  indeed,  are  only  semi-independent,  being 
tied  more  or  less  firmly  to  larger  firms  whose 
minor  wants  they  supply.  But  in  every  great 
industrial  province  are  found  numerous  genuine 
survivals  of  the  small  business,  worked  in  the 
home  or  the  small  workshop  with  no  expensive 
machinery  and  power.  The  essential  irregu- 
larities of  human  nature  are  largely  responsible 
for  such  survivals.  Where  the  personal  need, 


EXCHANGE   AND    PRICES         179 

or  taste,  or  fit,  is  the  basis  of  a  demand,  the 
routine  economies  of  the  big  business  are  at 
fault.  There  is  no  tendency  for  a  high-class 
tailoring  or  dressmaking  business  to  grow 
beyond  such  reasonable  size  as  will  admit  the 
keen  personal  control  of  a  capable  manager. 
In  all  the  luxury  trades,  where  irregularity 
of  demand  is  chronic  and  where  personal 
taste  and  caprice  impose  themselves,  small 
businesses  are  found.  Work  of  repair  forms 
a  basis  of  livelihood  for  many  artisans,  such 
as  shoemakers,  carpenters,  blacksmiths, 
though  the  making  of  the  original  goods  has 
passed  under  large  business  enterprise.  In 
agriculture,  in  mining,  and  in  transport, 
there  are  many  kinds  of  work  which  are  best 
and  most  profitable  in  small  forms.  The 
small  farmer  still  holds  his  own  for  many 
purposes.  In  retail  trade,  though  the  monster 
store  has  made  great  inroads,  the  high-grade 
shop  and  the  local  shop  for  minor  and  for 
perishable  goods  widely  survive. 

Moreover,  even  where  the  economy  of 
production  on  a  large  scale  prevails,  it  does 
not  follow  that  no  limit  can  be  set  upon  the 
advantage  of  size.  Because  a  big  business 
can  produce  more  cheaply  than  a  little 
business  and  so  can  undersell  it,  it  does  not 
follow  that  a  still  bigger  business  can  beat 
the  big  business  at  this  game.  Even  in  those 
industries  where  the  size  of  capital  counts 


180    THE  SCIENCE  OF  WEALTH 

for  most,  there  will  be  a  maximum  type  which 
cannot  be  exceeded  without  damage.  When 
a  business  grows  in  size  and  complexity 
beyond  a  certain  scale,  there  will  be  waste  of 
central  control  in  the  co-ordination  of  the 
parts  which  will  outweigh  the  mere  economies 
of  size.  After  a  manufacturing  business  has 
grown  to  a  scale  enabling  it  to  buy  its  materials, 
to  organize  its  labour,  to  market  its  produce 
and  to  obtain  credit,  on  the  best  terms,  any 
further  addition  to  its  size  will  weaken  it  and 
render  it  less  profitable.  This  size  of  net 
maximum  efficiency  will  vary  widely  in  the 
different  trades.  In  some  trades  it  will  only 
be  reached  by  a  giant  business  which  in  its 
growth  has  swallowed  its  competitors  and 
stands  alone  in  the  market,  a  monopolist. 
But  such  trades  are  the  exception  not  the 
rule,  even  in  countries  where  a  protective 
tariff  favours  them  by  isolating  the  national 
market.  Mere  advantage  of  size,  unaided 
by  natural  or  legal  supports,  very  seldom 
suffices  to  put  a  business  into  the  position 
of  a  monopolist,  able  to  dictate  prices  to 
buyers. 

The  real  risk  to  which  consumers  are 
exposed  in  modern  industry  is  rather  that  of 
suspended  or  mitigated  competition  among 
a  few  larger  businesses  than  that  of  a  com- 
plete monopoly.  The  economy  of  big  pro- 
duction seldom  hands  over  a  market  to  a 


EXCHANGE  AND   PRICES         181 

single  firm,  but  it  often  reduces  the  number 
of  effective  competitors  to  a  paucity  that 
enables  them  by  agreements  to  regulate  output 
and  fix  prices  high  enough  to  yield  them  a 
considerable  surplus  profit.  A  great  amount 
of  experimentation  in  methods  of  federation 
and  agreement  among  big  firms  in  the  same 
line  of  business  is  continually  going  on,  and 
perhaps  constitutes  at  the  present  time  a 
graver  menace  to  the  consuming  public  than 
any  domination  of  the  "  trust."  The  metal 
and  machine-making  trades,  for  instance, 
in  Great  Britain  and  America,  are  riddled 
with  agreements  for  regulating  selling  prices, 
while  shipping  and  railroad,  insurance  and 
banking  companies,  are  continually  form- 
ing "  combines,"  "  conferences  "  or  other 
associations  for  regulating  services  and  prices. 
Wherever  one  turns  in  modern  industry, 
combination  shows  itself  as  real  and  almost 
as  pervasive  a  force  as  competition.  Now, 
since  the  prime  motive  and  meaning  of  all 
these  forms  of  combination  is  the  acquisition 
of  "  surplus  "  profit,  it  is  evident  that  no 
survey  of  market  prices,  or  rates  of  exchange 
between  different  sorts  of  goods  and  services, 
can  ignore  the  loading  which  these  surpluses 
involve. 

The  history  of  every  stock  of  goods  exposed 
in  shops  for  sale,  if  thoroughly  investigated, 
would  show  that,  at  various  stages  in  their 


182    THE   SCIENCE  OF  WEALTH 

handling,  the  expenses  which  they  accumu- 
lated contain  pieces  of  unproductive  surplus 
that,  entering  into  the  market  price  at  some 
earlier  stage,  are  handed  on  to  the  later 
stages  with  fresh  accretions,  so  that  in  the 
final  shop-prices  cost  and  surplus  are  inex- 
tricably intertwined,  the  proportions  between 
the  two  differing  in  all  the  various  kinds  of 
articles. 


CHAPTER  X 

*  DEMAND    AND    SUPPLY 

REGARDING  the  industrial  system  as  a 
machinery  for  the  production  of  wealth,  we 
have  naturally  been  led  to  find  the  origin  of 
that  wealth  in  raw  materials  which,  passing 
through  the  various  productive  processes, 
gather  value  or  importance  from  the  work 
which  is  put  into  them,  until  as  finished 
commodities  they  pass  out  of  the  machine 
into  the  hands  of  consumers.  The  growing 
quantity  of  work  which  they  embody  is  repre- 
sented in  a  continual  growth  of  expenses  and 
of  price  as  the  goods  near  "completion,  these 
expenses  containing  the  sum  of  all  the  costs 
and  surpluses  entering  at  the  different  stages 
of  production. 

This  picture  of  raw  materials  and  goods 
constantly  absorbing  productive  energy  and 
expenses  as  they  flow  towards  consumption, 
ignores,  however,  the  controlling  part  exercised 
by  the  consumer.  The  end  and  aim  of  this 
application  of  productive  energy  is  the  satis- 
faction of  the  wants  of  consumers.1  We  have 

1  This  general  truth,  like  most  others,  needs  qualifying. 
Some  productive  activity  is  desired  on  its  own  account 
183 


184     THE   SCIENCE   OF   WEALTH 

already  seen  how  the  money  paid  over  the 
retail  counter  for  commodities,  circulating  up 
the  stream  of  production  as  payments  for  the 
various  productive  agents,  continually  stimu- 
lates the  output  of  productive  energy.  By  this 
demand  for  commodities  the  will  of  the  con- 
sumer controls  and  regulates  the  entire  system 
of  production.  That  system  exists  to  furnish 
him  with  "  utilities."  To  him  the  commodi- 
ties he  buys  are  storehouses  not  of  produc- 
tive costs  but  of  utility.  The  raw  materials 
and  goods  in  their  various  stages  of  production 
take  all  their  value  or  importance  from  the 
final  part  they  are  to  play  as  means  of  utility 
or  human  satisfaction.  The  machinery  and 
other  instruments  of  capital  are  similarly 
endowed  with  a  utility  from  the  consumable 
commodities  whose  production  they  assist. 
The  whole  of  the  industrial  system  can  be 
regarded,  from  this  standpoint,  as  an  arrange- 
ment of  goods  and  instruments  containing 
various  sorts  and  quantities  of  utility. 

The  utility  of  which  we  here  speak  is  not 
the  intrinsic  worth  of  things,  their  "  values  " 
in  Ruskin's  sense  as  yielding  true  vital  service 
by  their  consumption.  It  merely  measures 
the  actual  current  satisfaction  which  con- 
sumers impute  to  various  sorts  and  qualities 
of  goods,  not  the  satisfaction  they  "  ought  " 
to  impute  to  them  if  they  understood  their 
true  interests.  Thus  a  sovereign's  worth 


DEMAND  AND   SUPPLY  185 

of  raw  whisky  must,  for  our  present  purpose 
of  scientific  analysis,  be  deemed  to  have  the 
same  utility  as  a  sovereign's  worth  of  bread 
or  "  best  books.*5  It  is  the  actual  desires 
that  are  operative.  But  a  mere  desire  for 
"  utilities  "  and  commodities  containing 
them  has  no  effect.  In  order  that  a  desire 
may  be  "  effective  "  it  must  express  itself 
through  purchasing  power.  The  unsatisfied 
needs  and  desires  of  poor  people  for  goods  that 
are  beyond  their  meagre  incomes  have  no 
economic,  though  they  may  have  a  deep 
social  significance.  The  only  utility  that 
counts  expresses  itself  through  the  use  of 
actual  incomes.  The  use  of  incomes,  indi- 
vidual and  collective,  may  thus  be  regarded 
as  the  final  regulator  of  the  industrial  system. 
In  our  business  analysis  we  arrived  at  the 
conclusion  that  business  men  organized  the 
various  trades  and  businesses,  actuated  by 
the  desire  for  profits.  We  have  now  to  realize 
that  these  organizers  and  administrators  are 
themselves  the  instruments  or  agents  of  the 
consuming  public.  For  the  business  men, 
who  by  their  demand  for  capital  and  labour 
determine  how  much  of  these  productive 
forces  shall  go  into  this  trade  or  that,  are 
governed  in  their  turn  by  calculations  of  the 
quantities  of  products  they  can  market  at  a 
profitable  price.  Thus,  in  the  last  resort, 
it  is  the  actual  and  expected -demands  of 


186     THE   SCIENCE   OF   WEALTH 

customers  that  really  determine  how  much 
industrial  energy  of  various  sorts  goes  into 
the  different  trades. 

The  order  and  the  disorder  of  industry, 
then,  are  mainly  attributable  to  the  will  of 
the  consumer  operating  through  demand  for 
commodities.  It  is  to  the  urgency  and  im- 
portance of  the  different  "  demands  "  of  the 
consumer  that  we  must  look  for  a  chief 
explanation  of  the  size  of  the  different  trades 
and  the  proportion  of  the  productive  force 
that  they  employ. 

The  simplest  way  of  understanding  the 
control  of  the  consumer  is  to  begin  with  a 
one-man  system,  the  case  of  a  Robinson 
Crusoe.  How  would  such  a  man  who  had  by 
his  own  efforts  to  supply  all  his  needs  dispose 
of  his  time  ?  His  principal  requirements  are 
food,  clothing,  a  hut  and  some  tools  and 
weapons.  If  the  climate  is  tolerable,  a  certain 
minimum  of  food  will  rank  first  among  his 
needs.  An  average  of,  say,  two  hours'  work 
in  hunting  and  preparing  food,  let  us  suppose, 
will  give  him  that  amount.  If  he  wants  more 
variety  or  quantity  of  food,  and,  not  content 
with  picking  fruit  and  killing  game,  wishes 
to  till  a  piece  of  land  so  as  to  raise  crops,  that 
will  take  a  third  and  a  fourth  hour  a  day. 
But  some  clothes,  though  less  urgent  a  need 
than  the  food  obtainable  by  two  hours'  work, 
mav  be  as  desirable  as  the  food  which  a  third 


DEMAND   AND   SUPPLY         187 

hour  would  secure  and  more  desirable  than  that 
of  a  fourth  hour.  So  he  has  to  balance  cloth- 
ing against  food  for  the  use  of  his  third  and 
fourth  hours  in  the  working  day.  He  can 
make  and  repair  the  barely  necessary  clothing 
in  one  hour  a  day,  though  two  hours  would 
give  him  a  change  in  case  of  bad  weather  or 
damage.  But  a  hut  is  nearly  as  essential  as 
the  first  suit  of  clothes  and  more  essential 
than  the  second.  So  he  may  decide  to  give 
only  the  third  hour  to  making  clothes  and 
the  fourth  to  making  a  hut.  But  a  really 
commodious  hut  will  take  more  than  one  hour 
a  day  to  make  and  maintain.  Shall  he  give 
his  fifth  hour  also  to  hut-making  ?  Some 
tools  or  weapons  also  have  their  claim.  Shall 
they  come  in  at  this  point,  or  only  in  the  sixth 
hour  of  his  working  day,  after  two  hours  are 
given  to  hut-making  ?  But  the  extra  supply 
of  food,  postponed  for  the  sake  of  clothing 
and  a  hut,  may  here  again  press  its  claim. 
He  must  evidently  balance  the  three  claims 
in  his  fifth  hour,  that  of  improvements  in  his 
hut,  the  making  of  an  axe,  or  the  laying  in 
a  further  store  of  food.  Of  course  the  real 
problem  will  be  a  good  deal  more  complex 
than  this.  There  will  be  several  sorts  of  food 
competing  with  one  another  for  his  time  and 
energy.  When  he  has  got  a  certain  amount 
of  fruit,  though  he  could  do  with  more,  he 
would  prefer  hunting  for  some  flesh  and  fish. 


188    THE  SCIENCE  OF  WEALTH 

So  with  the  other  needs,  not  only  an  axe  but 
a  spade,  a  bow,  a  hammer,  are  very  useful :  they 
also  have  claims  upon  his  time.  If  he  is  a 
thoughtful  man,  he  will  adjust  these  various 
claims  upon  an  economical  principle,  so  as 
to  make  the  best  use  of  his  working  time. 
He  will  not  go  on  making  food  when  he  has 
enough  to  satisfy  his  hunger,  because  though 
he  could  do  with  some  more,  the  need  of  some 
clothing  will  assert  itself  more  strongly.  So 
with  all  the  other  needs,  he  will  balance 
them  against  one  another,  so  as  to  get  the 
maximum  of  utility  out  of  his  day's  work. 
He  will  stop  doing  each  sort  of  work  as  nearly 
as  possible  at  the  point  where  any  further 
product  will  be  felt  by  him  as  slightly  less 
desirable  than  some  other  thing  that  he  could 
employ  the  time  in  making.  At  that  second 
thing  he  will  go  on  working  until  he  has  got 
as  much  as  is  quite  necessary,  and  a  third 
want  becomes  more  urgent  than  an  increased 
satisfaction  of  the  second  want.  So  far  as 
he  thus  apportions  his  working  time  to  the 
best  advantage,  it  will  be  found  that  the  last 
quarter  of  an  hour  which  he  gives  to  food  is 
neither  more  nor  less  usefully  employed  than 
the  last  quarter  he  gives  to  clothes-making, 
to  his  hut  or  to  making  tools.  For  if  we 
supposed  the  last  quarter  of  an  hour  given  to 
food  produced  a  greater  utility  than  that 
given  to  hut-making,  it  would  be  a  wasteful 


DEMAND  AND   SUPPLY  189 

use  of  time.  So  far  as  he  consults  clearly 
his  best  interests,  he  will  arrange  his  different 
employments  so  that  the  last  portion  of  the 
products  of  all  of  them  are  equal  in  the  use 
or  enjoyment  they  afford. 

Now  suppose  that  other  people  come  and 
settle  upon  Crusoe's  island,  and  he  is  able  to 
get  an  income  for  himself  by  letting  or  selling 
desirable  building  sites.  With  this  income 
he  now  satisfies  his  needs  by  setting  other 
persons  to  produce  various  sorts  of  goods  which 
he  buys  from  them.  The  expenditure  of  his 
income  will  be  conducted  on  the  same  lines 
as  the  expenditure  of  his  working  day  when 
he  worked  for  himself.  Instead  of  laying 
out  just  so  much  time  in  making  each  several 
sort  of  food,  clothes,  house,  etc.,  he  will  lay 
out  just  so  much  money.  Part  of  his  income 
he  will  spend  on  food,  part  on  clothes,  part 
on  housing,  etc.  Though  the  first  part  of  his 
food  will  have  a  very  high  utility,  being  the 
first  necessary  of  life,  the  last  addition  to 
the  food  supply  he  buys  will  have  the  same 
importance  or  utility  for  him  as  the  last 
addition  to  his  clothes,  housing  or  any  other 
goods.  Say  that  he  spends  £10  a  year  on 
bread,  though  the  loaves  he  buys  with  the 
first  five  of  these  ten  pounds  have  an  enor- 
mous utility  for  him,  the  loaves  he  buys  with 
the  last  pound  could  easily  be  dispensed  with, 
and  have  neither  more  nor  less  utility  for  him 


190    THE  SCIENCE  OF  WEALTH 

than  the  last  pound's  worth  of  the  £10  he 
spends  on  clothing  or  the  last  pound's  worth 
of  the  £5  he  spends  upon  cigars.  The  last 
pound's  worth  of  loaves,  clothing  and  cigars 
he  buys  must  have  the  same  importance  or 
utility  for  him,  so  far  as  he  lays  out  his 
income  thoughtfully,  for  if  we  supposed  the 
last  loaves  he  bought  to  contain  more  utility 
than  the  last  cigars,  he  would  have  acted 
irrationally  and  uneconomically  in  not  in- 
creasing his  expenditure  on  bread  and  reducing 
his  expenditure  on  cigars. 

So  far,  then,  as  a  man  uses  his  income 
economically  so  as  to  get  the  largest  amount 
of  utility  from  spending  it,  the  last  or  least 
serviceable  portion  of  each  sort  of  goods  he 
buys  will  have  the  same  utility.  Though 
he  may  estimate  the  total  importance  of  his 
weekly  supply  of  bread  far  higher  than  that  of 
his  weekly  supply  of  tea,  and  the  latter  higher 
than  that  of  his  supply  of  tobacco,  the  last 
shilling  he  spends  on  bread  must  be  deemed  to 
furnish  him  the  same  quantity  of  satisfaction 
as  the  last  shilling  spent  on  tea  or  tobacco. 

Now  what  applies  here  to  the  expenditure 
of  an  individual  will  be  equally  found  applic- 
able to  the  more  complex  expenditure  of  the 
income  of  a  whole  community.  This  aggregate 
income  of  the  members  of  a  community  is 
spent  partly  in  buying  supplies  of  various 
sorts  of  foods,  clothing  and  other  prime 


DEMAND  AND   SUPPLY  191 

necessaries  or  comforts,  partly  in  buying 
innocent  or  noxious  luxuries.  Though  it  is 
evident  that  the  first  half  of  what  is  spent 
in  foods  and  other  necessaries  provides  far 
more  utility  than  the  first  half  of  what  is 
spent  on  luxuries,  it  remains  true  that  the 
last  or  least  useful  portion  of  the  bread,  meat 
and  other  "  necessaries  "  that  is  bought  for 
consumption  is  just  as  much  or  as  little 
useful  as  the  last  portion  of  any  of  the  luxuries. 
The  fact  that  the  last  portion  of  the  bread 
supply  might  have  a  very  high  utility,  if  it 
could  get  into  the  homes  of  needy  persons, 
is  not  here  relevant.  The  last  portion  of  the 
bread  supply  actually  sold  goes  to  swell  the 
waste  of  the  servants'  hall  in  wealthy  families, 
and  gives  out  no  more  utility  than  the  last 
box  of  cigars  or  the  last  bottle  of  champagne 
consumed  in  the  dining-rooms  of  the  same 
families. 

If,  then,  we  were  to  take  the  real  income  of 
this  country,  the  supply  of  loaves,  fish,  flesh 
and  fowl,  the  clothing,  furniture,  housing, 
jewellery,  etc.,  turned  out  of  the  industrial 
machine  in  a  year,  we  should  find  that  the 
least  serviceable  part  of  each  of  these  sorts 
of  goods,  when  consumed,  yielded  the  same 
amount  of  utility  or  satisfaction.  For  this 
balance  at  the  bottom  of  each  supply  is 
rendered  necessary  by  the  consideration  that 
consumers  are  always  comparing  and  balanc- 


192      THE   SCIENCE   OF   WEALTH 

ing  against  one  another  the  different  objects 
of  their  desire  in  laying  out  the  last  portions 
of  the  money  they  have  to  spend.  As,  then, 
each  individual  gets  the  most  for  his  money 
by  purchasing  a  number  of  supplies  the  last 
portions  of  which  represent  to  him  an  equal 
amount  of  utility,  so  it  will  be  with  the 
aggregate  of  individuals. 

The  objection  will  no  doubt  occur  that, 
with  the  very  unequal  distribution  of  incomes 
among  the  various  classes,  a  great  waste  of 
aggregate  utility  will  occur.  For  the  loaves, 
shirts,  chairs,  meat,  which,  forming  the  least 
serviceable  expenditure  of  the  rich,  have 
least  utility  attached  to  them,  might  have  a 
high  utility  if  they  could  have  been  purchased 
and  consumed  by  the  poor.  But  that  critic- 
ism, valid  enough  against  the  distribution  of 
income,  does  not  impair  the  accuracy  of  an 
analysis  of  utility  based  upon  existing  facts  of 
distribution.  In  considering  the  control  which 
the  actual  consumer  exercises  upon  industry 
through  demand  for  commodities,  it  is  im- 
portant clearly  to  recognize  the  equalization 
of  utility  at  the  base  of  each  supply  as  the 
immediate  instrument  for  regulating  industry. 

In  this  levelling  process  of  expenditure  on 
the  part  of  a  person  or  a  society  there  is 
nothing  mysterious.  It  is  simply  "  economy," 
the  laying  out  of  money  or  of  effort  to  the 
best  advantage.  Every  child  who,  with  a 


DEMAND  AND   SUPPLY  193 

shilling  to  spend,  decides  to  spend  twopence 
on  chocolates,  threepence  on  shot,  sixpence 
on  a  cinematograph  show  and  a  penny  on  a 
comic  paper,  performs  this  operation  of  com- 
paring and  equalizing  marginal  "  satisfactions  " 
or  "  utilities."  So  far  as  the  greater  part  of 
expenditure  is  concerned,  the  process  involves 
no  thought,  it  runs  by  routine.  If  a  man  has 
an  income  of  £500  a  year,  no  question  arises 
as  to  how  £450  shall  be  laid  out.  But  as 
regards  the  last  £50,  how  much  of  it  shall  go 
for  holidays,  how  much  for  theatres,  books, 
subscriptions,  how  much  for  savings,  that 
will  be  a  matter  for  some  careful  calculation 
or  individual  adjustment.  No  two  men  with 
£500  will  spend  the  last  £50  in  the  same  way  : 
no  man  will  distribute  this  expenditure  in 
the  same  way  two  years  running.  As  with 
an  individual  so  with  a  whole  society.  Most 
of  the  income  of  a  nation,  as  of  a  person,  is 
by  necessity  or  habit  allocated  to  settled 
expenditure  in  maintaining  a  standard  of 
consumption.  Only  the  last  portion,  or  any 
increase  of  income,  is  subject  to  the  process 
of  adjustment  which  we  describe.  This  gives 
great  interest  and  significance  to  the  last  or 
"  marginal  "  portions  of  income  in  directing 
changes  of  industry.  The  introduction  of 
a  new  luxury,  the  stimulation  of  a  new  taste 
in  a  consuming  class,  will  evidently  cause  a 
flow  of  capital  and  labour  into  the  industrial 


194    THE  SCIENCE   OF   WEALTH 

processes  which  are  needed  to  supply  the 
article.  The  sudden  direction  of  a  large 
portion  of  the  "  spare  "  income  of  the  well- 
to-do  into  a  demand  for  motor  cars  has 
brought  masses  of  new  capital  and  labour 
into  the  trades  providing  them,  has  helped 
to  make  a  rubber  boom,  and  has  injured 
the  carriage  trade  and  certain  other  luxury 
trades.  So  it  is  through  all  the  grades  of  a 
society:  new  articles  of  consumption,  music 
halls  and  skating  rinks,  cheap  reprints, 
canned  meats,  bananas,  popular  drugs,  force 
their  way,  first  as  casual  claimants,  then  as 
habits,  into  the  expenditure  of  some  grade 
of  the  working  classes,  with  important  direct 
and  indirect  reactions  upon  the  trades  that 
supply  them,  or  that  supply  other  articles 
which  they  have  displaced. 

One  is  tempted  to  conclude  that  in  these 
changes  of  taste  or  valuation  which  regulate 
the  last  items  of  expenditure  are  to  be  found 
the  governing  forces  of  industrial  life.  And 
great  significance  does  rightly  attach  to  them 
as  indexes  and  instruments  of  economic 
movement.  But  it  is  a  mistake  to  find  in 
them  the  special  causes  or  determinants  of 
industrial  change.  For  this  would  be  to 
neglect  two  important  considerations.  In 
speaking  of  the  new  demand  for  motor 
cars  we  assumed  that  it  originated  in  a  new 
taste  of  rich  consumers.  But  new  inventions 


DEMAND  AND   SUPPLY  195 

and  economies  of  production  which  put 
reliable  cars  on  the  market  at  lower  prices 
stimulated  and  made  effective  this  new 
demand.  And  in  most  cases  where  a  large 
rapid  increase  of  expenditure  upon  any 
article  takes  place,  improvements  and  econo- 
mies of  production  have  served  to  stimulate 
the  increased  demand.  In  a  word,  there  is 
interaction  between  the  forces  of  supply  and 
demand.  A  large  cheap  supply  of  cars  stimu- 
lates an  expansion  of  demand,  expanded 
demand  stimulates  a  cheapening  and  enlarge- 
ment of  supply.  So  it  is  with  almost  all 
economic  changes.  The  same  economy,  the 
same  constant  process  of  adjustment  towards 
an  equilibrium,  is  taking  place  in  production 
as  in  consumption.  The  new  or  unappro- 
priated capital  and  labour  and  ability  tend 
constantly  to  flow  into  those  trades  in  which 
some  recent  increase  of  demand  has  raised 
the  rate  of  interest,  profit,  wages,  slightly 
above  the  ordinary  level  of  other  trades,  and 
it  goes  on  flowing  until  the  increased  supply 
of  products  in  the  chosen  trades,  by  lowering 
prices,  has  restored  the  profit,  interest, 
wages,  to  the  common  level.  The  increased 
supply  and  falling  prices  thus  brought  about 
in  the  special  trades  in  question,  will  cause 
consumers  to  demand  larger  quantities  of 
these  products  and  will  extend  their  uses 
to  other  grades  of  the  consuming  public,  until 


196    THE  SCIENCE   OF  WEALTH 

a  new  balance  or  equilibrium  has  been  reached 
in  the  utility  or  satisfaction  of  the  consuming 
public.  Those  disturbances  and  readjust- 
ments are  always  going  on,  alike  in  the  costs 
of  industry  by  inventions  and  improvements, 
and  in  the  utilities  of  consumption  by  changes 
of  taste  and  growth  or  decay  of  needs. 

Another  consideration  is  equally  important. 
If  we  watched  a  number  of  tanks  of  water 
connected  by  pipes  with  one  another,  all  the 
changes  we  saw  would  appear  to  be  taking 
place  at  the  surface,  by  a  rise  or  a  fall  of  that 
surface.  If  an  additional  supply  of  water 
were  furnished  to  one  tank,  we  should  see  the 
surface  rising  in  each  other  tank  in  its  turn 
until  the  common  level  was  reached  again. 
But  though  for  observation  and  registration 
it  would  be  best  to  confine  our  attention  to 
the  changes  on  the  surface,  it  would  be  wrong 
to  conclude  that  the  causes  which  brought 
about  these  changes  had  any  particular 
reference  to  the  portions  of  the  water  on  the 
top.  For  it  might  well  be  the  case  that  the 
new  supply  of  water  to  the  first  tank  were 
made  not  at  the  surface  but  below,  and  that 
all  the  pipes  connecting  the  tanks  and  causing 
the  readjustment  discernible  upon  the  surface 
lay  deep  down.  So  in  industrial  changes  both 
on  the  side  of  production  and  consumption 
the  direct  forces  of  change  need  not  operate 
at  the  "  margins,"  the  least  efficient  portions 


DEMAND   AND   SUPPLY  197 

of  industrial  power  or  the  least  pressing  needs 
of  the  consumer.  In  industry  some  new 
general  economy  applied  by  all  the  repre- 
sentative firms  of  a  trade,  or  a  series  of  trades, 
some  new  economy  of  fuel,  or  the  utilization 
of  a  waste  product,  will,  by  raising  the  margins 
of  profit  throughout  the  whole  industry, 
regulate  the  distribution  of  the  new  capital 
and  labour,  so  as  to  secure,  as  far  as  free 
competition  exists,  an  equilibrium  of  profit 
among  the  various  industries.  So  in  the 
public  consumption,  the  initial  movement 
of  change  may  be  found  not  in  the  stimula- 
tion or  expansion  of  some  new  taste  just 
struggling  into  fashion,  but  in  some  altera- 
tion in  the  past  standard  of  consumption  in 
large  sections  of  the  public,  as,  for  example, 
in  a  general  weakening  of  the  taste  for  alcohol, 
or  a  general  rise  of  such  an  item  as  an  annual 
seaside  holiday  in  the  scale  of  values  of  the 
large  mechanic  classes. 

The  changes  at  the  margin,  the  readjust- 
ments of  the  least  valued  items  of  expenditure, 
of  the  least  profitable  items  of  industrial 
energy,  are  thus  to  be  regarded  rather  as 
instruments  for  registering  changes  than  as 
the  determining  causes. 

What  is  supremely  important  is  that 
students  of  industry  should  clearly  recognize 
the  methods  by  which  the  continual  changes 
in  the  arts  of  industry  and  the  valuations  or 


198    THE  SCIENCE  OF  WEALTH 

taste  of  consumers  alter  the  structure  of  the 
industrial  system.  These  forces  from  the 
supply  side  and  the  demand  side  meet  in 
what  is  called  a  Market,  and  their  opposing 
tendencies  are  reconciled  in  the  market  price. 
A  market  price  is  that  price  which  equalizes 
the  rate  of  demand  with  the  rate  of  supply, 
i.e.  just  enables  all  the  goods  offered  in  the 
market  to  find  buyers.  Take  the  instance 
of  a  cattle-market  where  a  sale  of  bullocks 
is  taking  place.  For  simplicity  we  will 
suppose  that  all  the  bullocks  for  sale  are 
known  by  all  the  parties  concerned  to  be  of 
the  same  size  and  quality.  Some  of  the 
sellers  are  in  urgent  need  of  cash  and  would 
be  prepared  to  sell  a  bullock  at  a  low  figure, 
say  anything  above  £5.  Some  of  the  buyers 
are  better  off  than  others,  and,  being  keener 
to  buy,  would  pay  a  price  as  high  as  £12 
rather  than  fail  to  get  a  bullock.  Let  us  set 
out  the  market  according  to  the  number  of 
willing  buyers  and  sellers  at  different  prices — 

Price        No.  of  sellers     No.  of  buyers 

£5                       2  12 

63  12 

74  10 

86  8 

97  7 

10  9  6 

11  12  4 

12  12  8 


DEMAND   AND   SUPPLY  199 

If  the  bidding  begins  at  £5  there  are  only 
2  bullocks  offered  at  that  price  and  12  willing 
buyers,  all  willing  to  pay  more  if  necessary. 
The  market  price  evidently  cannot  stand 
at  £5,  for  at  that  price  10  willing  buyers 
would  be  left  without  a  bullock,  and  to 
prevent  being  left  would  bid  more  than  £5. 
They  would  first  bid  £6.  But  at  that  price 
there  would  only  be  3  bullocks  for  sale  and 
12  willing  buyers.  The  latter,  still  bidding 
against  each  other,  would  force  the  price  to 
rise  higher.  At  £7  and  at  £8  the  same  diffi- 
culty would  remain.  Though  the  number 
of  bullocks  offered  and  the  number  of  willing 
buyers  approached  nearer,  so  long  as  there 
was  one  more  buyer  than  there  was  bullock, 
he,  fearing  to  be  left,  would  bid  against  the 
others  so  as  to  raise  the  price.  When  this 
excess  of  buyers  over  sellers  had  thus  driven 
up  the  price  to  £9,  there  would  be  found  to 
be  7  sellers  and  7  buyers  at  that  price,  i.  e. 
supply  is  equal  to  demand.  Could  the  price 
rise  higher  ?  No,  for  at  £10  there  would  be 
9  sellers  and  only  6  buyers,  and  the  com- 
petition of  the  extra  sellers  would  force  the 
price  down  to  £9,  just  as  the  competition 
of  the  extra  buyers  had  forced  it  up  to  that 
level.  £9  is  seen  to  be  the  only  possible 
market  price,  for  it  is  the  only  price  at  which 
the  number  of  willing  sellers  and  willing 
buyers  is  the  same.  So  long  as  supply 


200    THE   SCIENCE   OF   WEALTH 

exceeds  demand  the  price  falls,  so  long  as 
demand  exceeds  supply  the  price  rises. 
The  market  price  is  at  the  point  where  supply 
is  equal  to  demand. 

This  is  true  of  every  market  where  any- 
thing is  bought  and  sold  by  processes  of 
bargaining.  Where  buying  and  selling  is 
continuous,  as  in  most  wholesale  and  retail 
markets  for  the  sale  of  wheat,  cotton  or  other 
produce,  stocks  and  shares,  or  loaves,  fish, 
shoes,  coal  or  other  commodities,  it  is  not 
a  fixed  quantity  of  supply  or  demand  that 
determines  the  price  but  the  rate  of  supply 
and  demand.  The  market  price  in  London 
for  wheat  at  any  time  will  be  determined  at, 
say,  25s.  a  quarter,  by  the  fact  that  at  that 
price  the  rate  at  which  wheat  is  offered  at 
Mark  Lane  is  equal  to  the  rate  at  which  it 
is  being  bought  by  millers  and  other  pur- 
chasers. Where  the  market  is  a  continuous 
process,  Supply  and  Demand  are  to  be  re- 
garded as  "  flows  "  measured  over  a  period 
of  time  rather  than  as  fixed  quantities  bought 
and  sold  at  a  particular  time,  as  in  our  instance 
of  the  cattle  market. 

When  Midland  Railway  Stock  is  said  to 
sell  at  a  firm  price  of  65,  that  means  that  for 
some  time  the  number  of  shares  offered  at 
that  figure  continues  to  be  the  same  as  the 
number  of  shares  bought. 

Changes  of  price  always  mean  an  upset  in 


DEMAND   AND   SUPPLY  201 

the  equilibrium  between  the  rate  of  supply  and 
the  rate  of  demand. 

So  long  as  the  body  of  sellers  in  a  market 
can  go  on  selling  their  goods  at  the  same  pace 
as  hitherto,  they  will  not  lower  and  they 
cannot  with  advantage  raise  the  price.  If 
they  lower  the  price,  they  do  so  either  because 
there  is  a  fall  off  in  the  pace  at  which  buyers 
ask  for  the  articles,  or  because  they  have 
increased  their  stocks  and  wish  by  lowering 
prices  to  raise  demand  so  as  to  meet  the 
increased  rate  of  their  supply.  If  they  raise 
their  price,  it  is  either  because  buyers  are 
buying  more  frequently,  or  more  largely 
than  before,  so  depleting  their  supply  more 
rapidly,  or  because  they  are  finding  a  difficulty 
in  getting  a  supply  of  goods  at  the  same  price 
as  before.  Thus  the  immediate  cause  of  a 
rise  of  price  is  always  a  decrease  of  supply 
or  an  increase  of  demand  :  the  cause  of  a  fall 
of  price  is  always  an  increase  of  supply  or 
a  decrease  of  demand. 

Whenever  the  equilibrium  between  Supply 
and  Demand  is  thus  disturbed,  the  price 
continues  rising  or  falling  until  a  new  level 
is  reached  where  the  two  are  again  equal. 
This  readjustment  is  a  natural  tendency. 
For  if  an  increase  in  Supply  has  caused  prices 
to  fall,  that  fall  will  in  itself  stimulate  an 
increase  in  the  number  of  buyers  or  rate  of 
demand.  Similarly,  if  a  decrease  of  Supply 
G  2 


202     THE   SCIENCE   OF   WEALTH 

causes  prices  to  rise,  that  rise  of  prices  will 
reduce  the  number  of  buyers.  The  pace  at 
which  this  tendency  works  will  differ  with 
different  commodities.  In  some  cases  a  small 
rise  or  a  small  fall  of  price  will  have  a  con- 
siderable effect  upon  demand.  This  will 
usually  apply  to  luxuries,  which  do  not  satisfy 
any  strong  desire,  or  to  articles  for  which 
there  is  a  convenient  substitute.  In  the  case 
of  necessaries  or  articles  with  no  easy  substitute 
a  moderate  rise  or  fall  of  price  may  be  attended 
by  little  increase  or  decrease  of  demand.  In 
the  former  case  the  "  elasticity  of  demand  " 
is  said  to  be  small,  in  the  latter  case  large. 
The  rise  in  the  price  of  spirits,  following  the 
recent  increase  of  liquor  duties,  caused  a 
large  reduction  in  the  demand  for  spirits. 
A  corresponding  rise  in  price  of  wheat  would 
not  cause  a  corresponding  reduction  in  de- 
mand for  bread.  It  might  even  cause  no 
reduction,  so  far  as  large  classes  of  the  workers 
were  concerned.  For  the  rise  in  price  of 
bread  might  cause  them  to  buy  less  meat  or 
other  foods,  in  order  to  be  able  to  keep  up 
their  consumption  of  the  staff  of  life.  The 
effect  which  a  rise  or  fall  of  10  or  20  per  cent, 
in  the  price  of  any  article  will  have  upon 
demand  will  evidently  depend  upon  a  great 
number  of  circumstances,  and  will  differ  in 
different  social  classes  and  grades  of  income. 
Where  the  change  of  price  is  effected  from 


DEMAND  AND   SUPPLY          203 

the  demand  side,  similar  effects  will  be  pro- 
duced upon  rate  of  supply.  In  some  cases 
an  increasing  sale  will  enable  goods  to  be 
produced  more  economically  than  before,  so 
that  the  rise  of  market  price  will  be  very 
slight  and  very  temporary,  resulting  soon  in 
a  new  equilibrium  of  demand  and  supply  at 
a  lower  price  than  before.  In  other  cases 
an  increasing  sale  may  stimulate  supply  only 
by  causing  a  considerable  rise  of  price,  as 
where  in  order  to  create  the  new  required 
supply  worse  land  or  dearer  labour  must  be 
brought  into  use.  According  as  supply  does 
or  does  not  respond  easily  to  the  stimulus  of 
rising  prices  we  speak  of  it  as  "  elastic  "  or 
"  inelastic." 

All  these  important  occurrences  in  the 
economic  world  which  are  said  to  affect 
prices  work  by  means  of  this  mechanism  of 
Supply  and  Demand.  A  bad  harvest,  a  new 
discovery  of  gold,  a  war,  a  rapid  growth  of 
population,  a  new  invention  for  cheapening 
electricity,  a  temperance  movement,  affect 
prices,  sometimes  temporarily,  sometimes 
permanently.  But  in  all  cases  the  modus 
operandi  is  to  be  traced  in  changes  of  the 
relation  between  supply  and  demand  in  the 
markets. 

Most  markets  with  their  market  prices  are 
liable  to  numerous  minor  fluctuations  from 
a  variety  of  passing  and  casual  causes.  But 


204    THE   SCIENCE  OF  WEALTH 

behind  or  beneath  these  slight  oscillations 
are  to  be  traced  large  and  abiding  changes 
due  to  more  important  alterations  in  the  arts 
of  production  or  consumption.  These  normal 
or  lasting  changes  in  prices  will  arise  from, 
or  be  expressed  through,  rises  or  falls  in  the 
ordinary  expenses  of  production  on  the  one 
hand,  or  in  the  ordinary  utility  of  consumption 
upon  the  other. 

Expenses  of  production  will  rise  or  fall 
either  (1)  by  reason  of  some  alteration  in 
methods  of  production  affecting  costs,  or 
(2)  because  of  some  increase  or  reduction  in 
the  "  surplus  "  with  which  expenses  may  be 
loaded. 

(1)  Under  alteration  of  methods  of  produc- 
tion will  come  (a)  all  those  improvements  in 
the    arts    of    industry    due    to    mechanical, 
chemical  and  other  sciences,   which  are  the 
leading  feature  of  the  Industrial  Revolution; 
(6)  improvements  in  business  organization  and 
enterprise,  both  on  their  productive  and  their 
commercial  side;  (c)  improved  skill,  physique, 
education  and  character  of  the  workers. 

(2)  Under  influences  affecting  the  "  surplus  " 
element  we  may  include  (a)  discovery  or  de- 
velopment of  natural  sources  of  wealth,   or 
the  depletion  of  such  sources  causing  increased 
scarcity  and  a  larger  surplus  to  arise  in  some 
necessary  process ;  (&)  an  increase  or  decrease 
of  the  flow  of  capital  into  any  country  or  any 


DEMAND   AND   SUPPLY  205 

industry,  raising  or  lowering  the  expenses  of 
production.  This  flow  of  capital  is,  of  course, 
affected  by  innumerable  causes  related  to  the 
size  and  distribution  of  income,  security  of 
property,  foresight,  thrift  and  other  condi- 
tions affecting  saving  and  investment;  (c)  an 
increase  or  decrease  of  the  flow  of  labour  into 
the  several  countries  and  trades,  determined 
by  growth  of  population,  facilities  of  informa- 
tion and  of  transport,  and  influencing  division 
of  labour  and  the  labour-costs  of  production. 

All  these  causes  affecting  expenses  of  pro- 
duction will  impress  themselves  upon  prices 
through  enlarging  or  restricting  Supply.  Some 
of  them,  being  of  a  general  character,  will  affect 
most  of  the  industries  of  a  country,  or  of  the 
world,  though  in  different  degrees,  as,  for 
instance,  improvements  in  generating  power 
for  manufacture  or  transport.  Others,  being 
of  a  special  kind  only  applicable  to  some 
trades,  will  raise  or  lower  the  expenses  of 
certain  products  and  affect  their  rate  of  ex- 
change with  other  products. 

Corresponding  to  these  forces  playing 
through  expenses  of  production  upon  Supply 
are  other  forces,  playing  through  utility  upon 
Demand. 

(1)  An  immense  number  of  changes  are 
always  going  on  in  the  arts  of  consumption, 
i.  e.  in  the  utilization  of  the  various  forms  of 
wealth.  An  improved  fire-grate  saving  fuel, 


206    THE  SCIENCE  OF  WEALTH 

a  change  in  taste  or  habits  of  food  or  dress,  a 
keener  appreciation  of  books  or  recreation, 
and  a  thousand  other  changes,  will  result  in 
increased  or  reduced  demand  for  various 
commodities.  New  tastes  and  desires  are 
constantly  competing  with  and  displacing 
old  ones,  and  often  by  their  adoption  involve 
many  other  alterations  in  consumption  and 
expenditure.  The  reduced  use  of  alcohol,  for 
instance,  may  involve  less  consumption  of 
meat  and  a  higher  valuation  for  dairy  produce 
and  vegetable  foods. 

(2)  Apart  from  such  changes  in  tastes  and 
habits,  a  mere  increase  or  decrease  in  the  size 
of  the  income  of  a  nation  or  a  class  will  bring 
about  changes  in  the  proportion  of  expendi- 
ture upon  the  various  products.  The  general 
growth  of  income  in  large  sections  of  our 
workers  has  expressed  itself  in  an  increased 
appreciation  for  holidays  and  amusements  : 
the  large  growth  of  a  "  super-tax  "  class  has 
brought  an  increasing  demand  for  motor  cars 
and  other  expensive  luxuries. 

Such  are  the  forces  which  at  every  point 
of  the  industrial  system  are  operating  upon 
Supply  and  Demand  to  bring  about  the 
shifts  of  prices  that  are  constantly  taking 
place. 

If  we  regard  the  Consumer  as  calling  into 
being,  maintaining  and  directing,  by  his  needs 
and  tastes,  the  whole  of  this  great  elaborate 


DEMAND   AND   SUPPLY  207 

system  of  industrial  forces,  we  shall  see  this 
Consumer's  will  operating  everywhere  through 
demand,  first  for  commodities,  and  secondly 
for  the  various  productive  steps  and  instru- 
ments which  are  the  necessary  means  to  his 
end. 

If,  on  the  other  hand,  we  take  the  stand- 
point of  the  business  man,  or  Producer,  we 
shall  see  the  same  structure  and  operation 
of  the  industrial  system  as  a  gathering  stream 
of  material  and  energy  given  out  by  various 
co-operative  groups  of  factors  of  production, 
land,  labour  and  capital,  under  the  local 
guidance  of  business  ability,  moving  towards 
the  creation  of  quantities  of  finished  market- 
able goods  and  services. 


CHAPTER  XI 

THE   LABOUR   MOVEMENT   AND    STATE 
SOCIALISM 

THE  saying  that  all  progress  consists  in  the 
elimination  of  waste  has  a  special  applicability 
to  the  art  of  economic  progress.  It  furnishes 
a  test  for  the  validity  of  the  various  methods 
of  social-economic  reform  which  play  so 
conspicuous  a  part  in  modern  history.  In 
particular  it  can  be  seen  that  the  Labour 
Movement  on  the  one  hand,  and  the  enlarge- 
ment of  the  industrial  functions  of  the  State 
upon  the  other,  are  virtually  dependent  on 
the  existence  of  a  surplus.  It  will  be  worth 
while  to  make  this  dependence  clear. 

If  there  were  no  unproductive  surplus  in 
the  hands  of  capitalists,  landowners  and 
business  men,  the  validity  of  the  Labour 
Movement  would  hinge  almost  entirely  upon 
the  economy  of  high  wages,  short  hours,  and 
other  improved  conditions.  For  if  the  com- 
petition of  employers  and  capitalists  through- 
out the  industrial  system  were  everywhere 
so  keen  and  constant  as  to  keep  down  profits, 

208 


THE  LABOUR  MOVEMENT        209 

interests,  and  other  business  emoluments  at 
a  minimum,  any  co-operative  action  of  the 
workers,  involving  an  additional  cost  of 
labour  without  a  corresponding  increase  in 
the  productivity  of  labour,  would  evidently 
prove  disastrous  for  all  the  partners  in 
industry. 

In  other  words,  the  success  of  the  Labour 
Movement  would  be  confined  to  cases  where 
higher  wages,  shorter  hours,  etc.,  raised  the 
efficiency  of  labour  so  much  as  to  involve 
no  net  increase  in  the  labour-cost.  If  this 
view  were  correct,  all  conflicts  between 
capital  and  labour  would  be  wanton  acts  of 
folly  on  one  side  or  on  both.  For  if  higher 
wages  and  improved  conditions  of  labour 
of  necessity  were  followed  by  a  corresponding 
rise  of  productivity  of  labour,  how  foolish 
and  inhuman  for  employers  to  resist  such 
demands  !  And  how  wrong  trade  unions 
would  be  to  urge  demands  which,  going 
beyond  "  the  economy  of  high  wages,"  could 
not  be  conceded  by  employers  without  ruining 
their  businesses  ! 

But  the  existence  of  a  large  composite 
surplus  not  required  to  maintain  the  other 
factors  of  production,  but  taken  by  them  to 
be  applied  to  purposes  of  luxury  and  waste, 
supplies  a  rational  basis  for  the  Labour  Move- 
ment. If  the  workers  by  organizing,  alike 
in  their  several  trades  and  as  an  economic 


210    THE   SCIENCE  OF   WEALTH 

and  political  unity,  can  secure  portions  of 
this  surplus,  applying  it  in  the  form  of  higher 
wages  and  more  leisure  to  raise  their  standard 
of  life  and  work,  they  are  converting  waste 
into  genuine  wealth.  If  trade-unionism, 
through  collective  bargaining,  can  secure 
higher  wages,  by  reducing  the  payments 
made  as  rent,  surplus-interest,  and  surplus- 
profit,  no  damage  is  done  to  the  other  factors, 
while  an  important  contribution  has  been 
made  to  the  improved  efficiency  of  labour. 

To  this  main  object  the  policy  of  collective 
bargaining  is  directed.  Its  success,  like  that 
of  other  policies,  depends  upon  the  know- 
ledge, skill  and  temper  with  which  it  is 
applied.  Our  analysis  discloses  many  wide 
differences  in  the  quantity  of  surplus  avail- 
able for  distribution  in  the  different  trades. 
In  some  cases  a  large  portion  of  the  product 
goes  as  surplus-profit,  or  excessive  interest, 
or  is  paid  away  in  rents.  This  is  the  case 
where  free  competition  has  given  place  to 
combination  among  employers,  or  where 
some  landowner,  royalty-owner,  patentee,  or 
other  monopolist,  is  able  to  rack-rent  an 
industry.  Other  trades  stand  on  a  different 
footing,  close  competition  among  employers 
keeping  down  interest  and  profits  at  a  mini- 
mum, and  landlordism  taking  comparatively 
light  toll.  The  same  trade  will  at  one  time 
exhibit  a  large  surplus  profit,  at  another  none. 


THE  LABOUR  MOVEMENT       211 

The  tactics  of  Trade  Unionism  consist  in 
applying  pressure  at  those  industrial  points 
where  it  can  be  applied  with  safety.  An 
indiscriminate  demand  for  higher  wages, 
shorter  hours,  or  any  other  condition  involv- 
ing a  higher  wage-bill,  would  prove  injurious 
to  industry  and  the  injury  would  rapidly 
react  upon  the  workers.  For  an  industry 
where  keen  competition  keeps  down  profit 
and  interest  to  a  minimum  has  no  surplus 
capable  of  being  applied  to  raise  wages,  and 
if  by  sheer  strength  of  organization  higher 
wages  could  be  got,  the  trade  may  suffer 
damage  in  one  of  two  ways.  If  foreign  or 
other  outside  competition  prevents  the  em- 
ployers from  raising  the  price  of  the  product 
so  as  to  meet  the  enhanced  expenses  of  pro- 
duction, the  trade  will  perish  because  no 
fresh  capital  will  flow  into  it,  and  the  wear  and 
tear  of  existing  capital  will  not  be  replaced. 
If  it  is  possible  to  raise  the  price  of  the  pro- 
duct, that  rise  of  prices,  as  we  have  seen, 
must  cause  a  shrinkage  of  demand,  and  this 
will  mean  a  reduction  of  employment  of 
labour  which  in  its  turn  must  damage  the 
efficiency  of  the  labour  organization.  The 
validity  of  collective  bargaining  as  an  instru- 
ment for  raising  wages,  or  shortening  hours, 
clearly  depends  upon  the  directing  and  the 
timing  of  demands  so  as  to  secure  for  the 
workers  the  whole  or  part  of  some  unpro- 


212    THE   SCIENCE  OF  WEALTH 

ductive  surplus  ascertained  to  be  in  the 
possession  of  one  of  the  other  factors  with 
which  labour  is  co-operating.  It  is  not  the 
true  interest  of  labour  to  seek  to  encroach 
upon  such  interest,  profits,  or  other  elements 
of  income  as  are  necessary  to  evoke  the  full 
use  of  other  factors  of  production.  But 
where  any  payment  in  excess  of  this  amount 
is  made,  organized  labour  is  economically 
justified  in  trying  to  divert  this  surplus  into 
higher  wages. 

Whether,  and  to  what  extent,  Trade 
Unionism  can  succeed  in  thus  raising  wages, 
or  otherwise  improving  the  conditions  of 
labour,  at  the  expense  of  surplus-interest 
or  profits,  depends  upon  the  relative  strength 
of  the  organizations  of  workers  and  of  em- 
ployers. When  a  strong  organization  of 
labour  has  placed  effective  restrictions  on 
the  competition  of  "  free "  labour,  it  has 
often  been  able  to  bring  such  pressure  on 
keenly  competing  employers  as  to  raise 
wages  at  the  expense  of  surplus  interest  or 
profit.  But  where  employers  have  organized 
to  meet  such  pressure,  placing  restrictions 
in  their  turn  upon  the  inroads  of  "  free " 
capital  entering  their  trade,  they  have  usually 
succeeded  in  defeating  the  pressure  of  or- 
ganized labour.  For  their  smaller  number, 
larger  resources,  and  better  information, 
render  their  organization  more  effective  in  a 


THE  LABOUR  MOVEMENT       213 

conflict.  Even  in  skilled  and  well-organized 
departments  of  labour  there  is  a  growing 
recognition  of  the  inadequacy  of  Trade 
Unionism  as  a  method  of  securing  for  the 
workers  a  sufficient  share  of  the  surplus 
wealth.  Moreover,  it  is  made  continually 
more  evident  that  the  very  policy  which 
strong  trade  unions  must  adopt  to  limit 
the  inflow  of  "  free "  labour  from  outside 
renders  it  more  difficult  for  lower-skilled 
workers  to  organize  their  labour  markets, 
which  are  flooded  with  the  labour  excluded 
from  entry  into  the  higher  grades  of  employ- 
ment. 

The  recognition  of  these  facts  is  driving 
the  Labour  Movement  into  politics.  There 
is  a  disposition  among  the  workers,  who  form 
the  majority  of  citizens,  to  use  the  State  in 
order  to  supplement  trade  union  and  other 
private  co-operative  and  philanthropic  efforts 
to  raise  their  standard  of  work  and  life. 
Although  history  shows  that  the  State  has 
always  been  utilized  for  the  economic  benefit 
of  any  class  which  acquired  political  control 
or  influence,  virtuous  citizens  have  always 
protested  against  the  partiality  and  corrup- 
tion involved  in  such  use  of  politics,  and  now 
profess  concern  lest  the  working  classes 
should  injure  both  the  State  and  industry 
by  unwise  interferences  with  private  enter- 
prise and  with  the  rights  of  private  property. 


214    THE  SCIENCE  OF  WEALTH 

"  Because  landowners,  manufacturers,  and 
other  business  classes  have  in  the  past  used 
politics  for  their  own  economic  ends,  making 
and  administering  laws,  treaties  or  tariffs, 
and  using  the  diplomatic  and  military  forces 
of  the  State  for  their  business  purposes,  that 
is  no  reason  why  the  workers  should,  if  they 
get  the  power,  follow  the  same  dishonest 
and  misguided  policy  in  the  interests  of  their 
class."  Such  is  the  objection.  In  reply, 
it  is  often  deemed  sufficient  to  insist  upon 
two  points.  In  the  first  place,  it  is  con- 
tended that  where  the  working  classes  form, 
as  they  do,  the  overwhelming  majority  of  the 
electorate,  their  voice  and  their  interests 
may  be  considered  as  the  voice  and  interests 
of  "  the  people  "  in  a  country  where  majority 
rule  is  acknowledged.  Secondly,  it  is  con- 
tended that  many  or  most  of  the  demands 
which  the  workers  would  enforce  through  the 
State  consist  in  the  alteration  or  reversal 
of  legal  rights  or  other  advantages  secured 
by  landowners,  capitalists,  and  other  business 
classes  formerly  in  control  of  the  State. 

Now,  though  both  these  answers  have 
some  force,  they  do  not  suffice  to  meet  the 
economic  objection,  that  the  wage-earning 
classes  might  use  their  political  power  to 
injure  the  industrial  system  and  to  check 
the  growth  of  wealth,  by  a  short-sighted 
endeavour  to  raise  wages  and  improve  the 


THE  LABOUR  MOVEMENT       215 

condition  of   labour  at    the    expense  of   the 
propertied  classes. 

The  only  effective  answer  is  to  show  that 
the  demands  which  labour  seeks  to  enforce 
by  means  of  the  State,  though  primarily 
motived  by  the  interests  of  a  class,  are  ulti- 
mately consistent  with  and  conducive  to 
the  interests  of  society  as  a  whole.  This  is 
not  proved  merely  by  pointing  out  that  the 
workers  are  by  far  the  largest  class.  It  must 
be  shown  that  the  policy  they  advocate  is 
not  in  the  long  run  injurious  to  the  structure 
of  industry.  Now  the  acceptance  of  the 
doctrine  of  an  unproductive  surplus  un- 
doubtedly supports  this  interpretation  of 
the  labour  policy.  For  so  far  as  it  is  accur- 
ately directed  to  convert  portions  of  the  un- 
productive surplus  into  increased  wages  and 
leisure  and  other  improved  conditions  of 
labour,  the  labour  policy  can  claim  to  be  a 
social  policy.  By  transforming  unproduc- 
tive into  productive  surplus,  it  makes  for 
industrial  health  and  growth.  To  divert 
rents  or  surplus  profits  into  a  fund  for  secur- 
ing a  fuller  subsistence  for  wage-earners  and 
for  enabling  them  to  acquire  for  themselves 
and  their  families  a  larger  share  of  the  com- 
forts and  conveniences  of  civilized  life,  with 
ampler  leisure,  recreation  and  education, 
is  a  double  social  gain.  It  enhances  the 
amount  of  utility  and  satisfaction  got  from 


216    THE   SCIENCE  OF  WEALTH 

the  income  thus  directed,  and  it  promotes 
industrial  progress  by  raising  the  efficiency 
of  labour. 

The  contribution  of  a  reasonable  labour 
policy  to  a  social  policy  is  best  illustrated  by 
the  struggle  for  the  "  minimum  standard." 
Whatever  be  the  exact  form  or  contents 
of  our  conception  of  social  progress,  it  de- 
mands as  a  first  indispensable  condition  a 
solution  of  the  economic  problem  of  poverty. 
This  problem  is  of  complex  structure,  distin- 
guishable into  several  strata.  At  the  bottom 
it  appears  as  destitution,  and  the  slowly  but 
surely  growing  recognition  that  the  safety  of 
society  requires  the  abolition  of  destitution 
has  brought  the  State  at  many  points  into 
sympathetic  contact  with  the  Labour  Move- 
ment. Public  opinion  everywhere  demands 
that  preventive  measures  shall  be  taken  by 
society  against  low  wages,  over-work,  neg- 
lected childhood,  insanitary  housing,  sickness, 
accidents,  intemperance,  unemployment,  help- 
less age,  adequate  public  remedies  being  sub- 
stituted for  inadequate  and  degrading  private 
charity. 

For  this  purpose  a  series  of  public  health, 
educational,  industrial  and  philanthropic  pro- 
visions are  in  course  of  adoption  by  modern 
States,  based  upon  two  assumptions :  first, 
that  large  sections  of  the  working  classes  are 
unable,  as  individuals  or  by  private  co- 


THE  LABOUR  MOVEMENT       217 

operation,  to  make  adequate  provision  against 
many  injurious  and  degrading  incidents  of 
their  economic  situation ;  secondly,  that  it 
is  a  sound  social  policy  to  utilize  the  resources 
of  the  State  to  assist  them  in  doing  what 
they  cannot  do  themselves.  Free  hospitals, 
old  age  pensions,  fuller  provision  against 
unemployment,  and  wages  boards  are  illustra- 
tions of  several  branches  of  this  new  State 
policy. 

It  is  noteworthy  that  in  all  these  services 
the  State  is  supplementing  or  displacing 
recognized  activities  of  the  Labour  Move- 
ment, and  is  being  brought  at  several  points 
into  direct  co-operation  with  that  movement. 

But  security  against  physical  destitution 
is  no  sufficient  foundation  for  a  civilized  life. 
It  is  the  interest  of  every  society  that  all 
its  members  shall,  in  return  for  work  rendered 
to  society,  enjoy  an  income  sufficient  to 
enable  them  to  maintain  themselves  and 
their  family  in  full  physical  efficiency,  with 
access  to  all  reasonable  opportunities  of 
general  and  technical  education,  and  to  such 
social  intercourse,  recreation  and  liberty  of 
travel,  as  are  needed  for  a  good  workman  and 
citizen.  Now  modern  statesmen  clearly  re- 
cognize that  for  the  great  mass  of  workers 
some  or  all  of  these  socially  desirable  condi- 
tions are  not  attainable  by  individual  or 
collective  bargaining.  Neither  competition 


218    THE   SCIENCE  OF  WEALTH 

nor  combination  in  modern  industry  yields 
to  workmen  any  sufficient  security  for  such 
a  standard  of  work  and  life  as  is  required. 
The  State  must  supplement  the  labour  policy. 
It  does  so  directly  in  two  ways.  First,  it 
imposes  conditions  of  employment  expressly 
designed  to  regulate  wages,  hours  or  other 
conditions  in  a  manner  favourable  to  the 
workers.  The  Wage  Board  experiment  in 
Australia  is  the  most  advanced  example  of 
a  policy  which  in  this  country  is  at  present 
confined  to  a  few  selected  "  sweated  "  trades. 
But  State  regulation  of  wages  here  applies 
not  only  to  the  growing  number  of  public 
employees  but  to  the  large  amount  of  private 
industry  affected  by  public  contracts.  The 
policy  here  pursued  is  a  definite  recognition 
that  private  bargaining  does  not  secure  con- 
ditions of  labour  conducive  to  the  social 
welfare.  The  great  body  of  modern  indus- 
trial legislation  in  Factory  and  Workshops 
Acts,  Employers'  Liability,  Shop-hours  and 
other  regulative  Acts,  is  an  expression  of 
this  fuller  policy  of  protection  for  labour. 
It  is  a  piecemeal  endeavour  to  build  up  a 
standard  of  employment  consistent  with  the 
minimum  demands  of  our  current  civilization. 
It  is  reinforced  by  another  body  of  State 
regulations  which,  regarded  from  the  stand- 
point of  the  workers,  aim  at  improving  their 
standard  of  living.  Under  this  head  may 


THE  LABOUR  MOVEMENT       219 

be  grouped  much  sanitary  legislation,  food 
adulteration  Acts,  and  other  protection  against 
dangerous  goods  and  services,  while  free  or 
subsidized  education  and  recreation,  includ- 
ing libraries,  parks,  baths  and  other  amenities, 
may  be  brought  under  the  same  policy.  The 
chief  economic  effect  of  these  various  public 
services  is  to  enable  the  workers  to  make  a 
better  or  a  more  economical  use  of  their 
earnings  than  they  could  under  a  complete 
system  of  laissez-faire,  and  to  furnish  to  them 
at  the  public  cost  certain  services  they  could 
not  otherwise  obtain.  Regarded  from  the 
special  standpoint  of  the  economic  interests 
of  the  working  classes,  this  double  set  of 
State  activities  is  engaged  in  expending  public 
resources  to  build  up  a  minimum  standard 
of  health,  knowledge,  enjoyment,  taste,  char- 
acter and'  conduct,  for  those  classes  who  are 
unable  to  make  an  adequate  provision  for 
these  thing?  out  of  the  income  they  earn  by 
the  sale  of  their  labour-power.  It  is  an 
elaborate  indirect  attempt  to  readjust  the 
adverse  conditions  of  the  wage-bargain. 

This  is,  of  course,  but  a  one-sided  and 
partial  interpretation  of  a  wider  social  policy. 
For  while  some  of  this  public  work  and  expen- 
diture has  exclusive  reference  to  wage-earners, 
much  of  it  claims  a  fuller  social  bearing. 
Though  the  poorer  classes  may  get  most 
benefit  out  of  public  money  spent  on  educa- 


220     THE  SCIENCE  OF  WEALTH 

tion,  recreation  and  even  sanitation,  it  will 
be  rightly  held  that  these  services  are  directed 
and  intended  less  to  fill  the  deficiencies  of  a 
class  than  to  protect  and  improve  the  social 
organism  as  a  whole.  When  we  approach 
the  higher  grades  of  State  activity,  such 
as  higher  education,  the  encouragement  of 
science,  literature  and  the  fine  arts,  the 
expenditure  upon  transport  or  the  cesthetic 
improvement  of  our  cities,  we  recognize  that 
the  social  policy  is  less  and  less  identified 
with  the  interests  of  any  class. 

These  State  services,  anti-destitutional, 
educational,  developmental,  together  with 
those  defensive  services  which  consume  so 
much  of  the  revenue  of  most  States,  involve 
the  expenditure  of  a  large  and  growing  public 
revenue.  The  provision  of  this  revenue  itself 
occupies  a  place  of  growing  prominence  in 
the  art  of  government.  The  chief  difficulty 
in  this  art  of  public  finance  arises  from  a 
defective  understanding  of  the  part  played 
by  the  State  in  industry  and  therefore  of 
its  claim  to  revenue.  The  notion  that  the 
State  exists  merely  to  protect  the  lives  and 
property  of  individual  citizens,  and  that  for 
the  performance  of  this  duty  it  is  entitled 
to  exact  a  contribution  from  each  citizen, 
proportionate  either  to  his  means  or  to  the 
protective  benefit  he  receives  from  the  State, 
still  underlies  the  common  conception  of 


THE  LABOUR  MOVEMENT       221 

public  revenue.  The  effect  of  this  view  has 
been  to  impose  narrow  limits  upon  State 
activities,  and  to  regard  the  greater  part  of 
the  public  revenue  as  derived  from  confisca- 
tion of  the  property  of  individual  citizens. 

At  the  present  time  the  theory  and  practice 
of  public  revenue  is  slowly  emerging  from 
these  misconceptions.  On  the  one  hand, 
we  see  most  civilized  States  transgressing  the 
old  protective  limits  by  engaging  in  a  large 
variety  of  constructive  measures  for  the 
development  of  the  economic  and  human 
resources  of  the  nation.  On  the  other,  we 
see  a  growing  recognition  of  public  revenue 
as  an  income  to  which  the  State  has  a  right, 
on  the  ground  that  public  services  have 
earned  it.  This  latter  doctrine  is,  indeed,  as 
yet  not  accepted  in  its  completeness,  except 
as  regards  the  public  revenue  taken  in  the 
ordinary  way  as  profit  or  rent  from  publicly 
owned  property  or  publicly  administered 
industries.  The  rents  of  public  lands,  mines, 
or  other  estates  belonging  to  the  Crown, 
the  profits  of  the  Post  Office,  of  a  municipal 
water  or  tram  service,  are  evidently  public 
income  on  the  same  footing  with  the  similarly 
earned  income  of  any  private  corporation. 
Wherever  the  State  or  city  performs  a  par- 
ticular service  and  takes  a  price  from  the 
recipient,  whether  that  price  is  paid  retail, 
as  in  the  case  of  the  Post  Office,  or  wholesale 


222    THE  SCIENCE   OF  WEALTH 

as  by  some  annual  rate  or  fee,  the  public 
evidently  ranks  with  other  businesses  and  has 
the  same  sort  of  right  to  its  profit. 

Of  course  the  public  may  abuse  the  right, 
exacting  a  higher  payment  than  it  ought  for] 
what  it  sells.  Being  usually  a  monopolist, 
excluding  or  limiting  private  enterprise,  it  is 
often  in  a  position  to  abuse  its  power  of  fixing 
prices.  Many  of  the  services  it  undertakes 
are  for  the  supply  of  necessaries  or  primary 
conveniences  of  life,  such  as  transport,  water, 
lighting.  It  is  therefore  able  to  swell  the 
public  revenue  by  exacting  what  would  be 
in  a  private  business  surplus-profit.  Some 
States  and  cities  practise  this  finance,  using 
certain  monopolies,  such  as  salt,  matches, 
tobacco,  alcohol,  as  instruments  of  public 
revenue.  This  is  sometimes  denounced  as 
if  it  were  an  abuse  precisely  on  all  fours 
with  the  similar  exactions  of  a  trust  or  other 
monopoly  in  the  business  world.  But  it  is 
not.  For  there  are  two  differences.  The 
surplus-profits  of  a  State  monopoly,  though 
unearned  by  the  specific  services  rendered, 
go  to  a  public  income  designed  for  expendi- 
ture upon  socially  useful  services,  whereas 
the  surplus-profit  of  a  private  trust  goes  to 
swell  an  unproductive  surplus  of  private 
individuals.  Again,  the  high  prices  exacted 
by  the  State  may  be  dictated  by  considera- 
tions not  merely  of  public  revenue,  but  of 


THE  LABOUR  MOVEMENT       223 

public   order,   as   in  the  case  of  alcohol   or 
explosives. 

But  when  a  public  monopoly  is  made  a 
means  of  exacting  profits  higher  than  the 
ordinary  business  rate,  it  must  be  admitted 
that  this  excess  is  of  the  nature  of  taxation 
and  must  be  defended  as  such.  It  is, 
therefore,  to  the  new  conception  of  taxation 
as  the  chief  means  of  providing  public  revenue 
that  we  must  turn  for  an  understanding  of 
the  relations  of  the  State  towards  the  indus- 
trial system.  This  new  conception  takes 
practical,  experimental  shape  in  the  distinc- 
tion between  earned  and  unearned  income, 
and  in  the  insistence  that  the  State  has  a 
right  to  share  in  the  latter.  Indeed,  it  is 
evident  that  to  elements  of  private  income 
and  property  regarded  as  "  unearned  "  every 
modern  State  is  beginning  more  and  more  to 
look  for  the  increasing  revenue  required  to 
fulfil  the  larger  modern  functions  of  a  pro- 
gressive State.  The  two  conceptions  react 
on  one  another.  The  perception  that  there 
are  "  large  unearned  "  sources  of  wealth  to 
tap  enables  and  incites  modern  States  and 
cities  to  undertake  new  constructive  services 
in  education,  housing,  town-planning,  "  social 
reform,"  which  were  not  formerly  considered 
financially  feasible.  This  fuller  realization, 
on  the  other  hand,  of  what  a  State  or  city 
can  and  ought  to  do  for  the  common  good, 


224     THE   SCIENCE   OF   WEALTH 

incites  governments  to  a  clearer  recognition 
and  a  closer  scrutiny  of  "  unearned  "  wealth. 

The  self-interest  of  governments  is  every- 
where driving  them  to  seek  more  public 
revenue  from  "  unearned  "  incomes  and  pro- 
perty. Such  finance,  at  any  rate  in  countries 
where  forms  of  representative  government 
prevail,  lies  along  the  line  of  least  resistance. 
Everywhere  it  is  felt  and  seen  that  rents 
of  land,  profits  and  dividends  from  liquor 
licences  and  from  other  businesses  which, 
escaping  the  full  brunt  of  competition,  are 
able  to  regulate  output  and  selling  price, 
contain  large  elements  of  gain  which  can  be 
taxed  without  injury  to  the  industries  affected. 

If  it  were  possible  to  track  down  all  sorts 
of  unearned  wealth  to  a  single  source,  as  do 
some  of  the  disciples  of  Henry  George,  or  even 
to  a  few  clearly  ascertainable  and  measurable 
sources,  a  fairly  simple  policy  of  securing 
such  wealth  for  public  revenue  might  be 
enforced.  One  of  two  methods  could  be 
adopted :  nationalization  or  specific  taxation. 
The  first  method  would  mean  the  acquisition 
and  ownership  by  public  authorities  of  the 
land,  or  of  such  portions  as  possessed  any  con- 
siderable amount  of  present  or  prospective 
land-values.  The  effective  working  of  this 
ownership  policy  might  also  necessitate  the 
public  ownership  and  operation  of  railways, 
mines  and  quarries,  and  perhaps  buildings,  as 


being  in  such  intimate  connection  with  the  land 
as  to  suck  value  out  of  it.  Along  with  this 
would  go  the  public  ownership  of  other  natural 
monopolies,  the  retail  liquor  trade,  banking 
and  insurance,  the  telegraph,  telephone,  and 
some  other  means  of  transport  and  communi- 
cation, the  chief  municipal  services,  and  per- 
haps certain  of  the  distributive  trades  in  which 
the  arts  of  combination  or  adulteration  were 
likely  to  be  used  by  private  traders  to  the 
public  detriment.  This  limited  State  Social- 
ism, though  motived  partly  by  other  con- 
siderations, such  as  the  defence  of  the 
consuming  public  against  high  prices  or 
inferior  qualities  of  goods  or  services, 
would  be  directed  primarily  to  secure  pub- 
lic revenue.  It  would  furnish  the  State 
income  from  the  ownership  and  operation 
of  monopolies. 

The  other  method  would  leave  the  land, 
the  railways  and  other  instruments  of  "  sur- 
plus "  income  in  private  possession  and  use, 
but  would  secure  for  the  State  such  share 
of  the  surplus  as  it  required  by  direct  taxa- 
tion. Economists  have  agreed  that  taxes 
upon  economic  rents  of  land  cannot  be  shifted, 
and  that  not  only  do  they  inflict  no  injury 
upon  the  socially  advantageous  uses  of  land, 
but  they  may  be  so  applied  as  to  improve 
those  uses.  What  holds  of  the  rents  of  land, 
holds  also  of  other  monopoly  values.  Since 


226     THE   SCIENCE   OF   WEALTH 

the  monopolist  has  usually  fixed  the  rents 
or  other  charges  for  the  goods  or  services  he 
sells  at  the  figure  which  he  estimates  will 
yield  him  the  largest  amount  of  revenue, 
he  will  not  raise  his  prices  in  consequence  of 
the  taxation  he  is  called  upon  to  bear.  For 
it  will  not  usually  pay  him  to  do  so.  The 
taxation  is  likely  to  stimulate  him  to  more 
economy  in  methods  of  conducting  his  busi- 
ness, as  it  stimulates  the  landowner  to  put 
his  land  to  more  profitable  use.  It  will  not 
induce  him  to  restrict  his  output,  or  to 
withhold  any  personal  service  which  hitherto 
he  had  given  forth.  This  economic  doctrine 
of  the  taxation  of  "  monopolies  "  is  generally 
accepted. 

But  the  analysis  of  industrial  processes  set 
forth  in  this  book  indicates  a  much  wider  and 
more  various  application.  For  if  it  be  the 
case  that  surplus  income  emerges  not  only 
from  the  possession  of  land  or  of  some  few 
definite  "  monopolies,"  but  from  a  great 
number  and  variety  of  circumstances  and 
situations  which  afford  a  scarcity  value  to 
some  sort  of  capital  or  ability  that  has  gained 
a  "coign  of  vantage,"  the  amount  of  "surplus  " 
available  for  public  revenue  through  taxation 
is  greatly  enlarged.  The  profitable  fruits  of 
business  trusts,  combinations,  pools  and 
price-agreements,  the  gains  from  corners  or 
manipulation  of  markets,  from  tariffs,  charters 


THE  LABOUR  MOVEMENT  227 
or  other  public  aids,  from  inventions  or 
superior  business  organization,  from  high  fees 
and  salaries,  are  all  in  various  degrees  amenable 
to  the  taxing  policy.  The  fact  that  most  of 
these  businesses  or  professional  activities 
involve  a  genuine  output  of  useful  personal 
ability,  though  complicating  the  taxing 
policy,  does  not  affect  the  principle.  The 
incomes  derived  from  them  contain  elements 
of  scarcity  value,  unearned  elements  which, 
though  not  directly  separable  from  the  neces- 
sary wage  of  ability,  or  minimum  interest 
and  profit,  are  nevertheless  a  proper  object 
for  taxation.  Some  of  them  are  as  large 
and  more  enduring  than  the  incomes  derived 
from  city  lands  or  liquor  licences,  others  are 
fortuitous  and  fluctuating.  But,  forming  as 
they  do  a  very  large  share  of  the  unproductive 
surplus,  public  policy  requires  that  due 
attention  be  devoted  to  them  as  a  source  of 
public  revenue. 

Their  complex  character  and  the  difficulty 
of  measuring  them,  however,  render  specific 
taxation  unsuitable.  The  variety,  complexity 
and  aggregate  size  of  these  more  shifting 
**  surpluses  "  furnish  the  true  economic  justi- 
fication for  general  progressive  taxation  of 
incomes  and  inheritances.  All  taxes  liable 
to  fall  upon  any  income  which  is  a  true  cost 
of  subsistence  or  of  growth,  i.  e.  the  efficiency 
wage  of  labour,  the  minimum  interest,  profit 


228     THE   SCIENCE   OF   WEALTH 

or  other  payment  of  ability,  are  bad  taxes. 
For,  by  impairing  the  efficiency  of  a  factor 
of  production  they  injure  the  future  production 
of  wealth,  and  reduce  the  surplus  capable  of 
contributing  to  future  public  revenue.  AJ1 
taxation,  therefore,  should  be  confined  to 
"  unproductive  surplus,"  taking  out  of  it 
such  revenue  as  the  State  can  advantage- 
ously expend  in  the  sustenance  and  develop- 
ment of  the  public  services.  The  general 
income  and  inheritance  taxes,  which  in  most 
civilized  states  play  a  part  of  increasing 
importance,  are  the  best  instruments  for 
securing  this  contribution.  Their  progressive 
graduation  is  defensible  upon  the  ground 
that  the  proportion  of  "  unproductive 
surplus  "  varies  directly  with  the  size  of  the 
income  or  estate.  This  supposition  may 
certainly  be  accepted  as  valid.  The  larger 
the  income  or  estate,  the  larger  the  amount  of 
unproductive  surplus  it  usually  carries,  and 
so  the  larger  the  amount  it  can  contribute  to 
the  State  without  injury  to  the  factor  which 
received  the  income. 

The  difficulty  of  discriminating  such 
"  unearned  "  income  from  the  "  earned  " 
incomes  in  which  it  is  often  incorporated, 
however,  obliges  the  State  to  proceed  in 
an  experimental  manner.  Grave  practical 
difficulties  confront  a  State  endeavouring  to 
tax  surplus  out  of  large  incomes.  Conceal- 


THE   LABOUR   MOVEMENT       229 

ment  of  income  is  often  possible,  and  modern 
international  finance  makes  it  possible  and 
easy  for  some  sorts  of  "  surplus  "  to  dodge 
taxation  by  emerging  abroad  and  coming 
home  in  disguise.  As  internationalism  in 
business  grows  commoner,  it  will  become 
exceedingly  difficult  for  any  state  to  proceed 
much  faster  than  other  states  in  the  taxation 
of  current  income.  Partly  to  avoid  these 
difficulties,  but  more  largely  because  in- 
heritances are  admittedly  unearned  by  the 
recipients,  there  is  a  growing  disposition  to 
rely  upon  death  duties  more  than  upon 
increased  income  tax  for  revenue. 

Financial  statesmen  have  been  driven 
along  these  roads  of  revenue  more  by  con- 
siderations of  financial  opportunism  than  by 
the  clear-eyed  acceptance  of  economic 
principles.  But  it  is  particularly  desirable 
for  those  who  realize  the  necessity  under 
which  a  modern  state  continually  finds  itself 
of  needing  increased  revenue,  to  understand 
the  proper  sources  of  taxation  and  the 
rationale  of  the  taxing  process.  Taxation  is 
not  a  confiscation  of  the  earned  property  or 
income  of  individual  citizens,  the  product  of 
their  personal  effort  or  ability.  It  is  a  means 
by  which  the  State,  as  the  representative  of 
social  activities  and  needs,  asserts  its  claim 
to  the  income  which  society  has  earned  by 
the  various  aids  rendered  to  its  individual 


230     THE   SCIENCE   OF   WEALTH 

members.  The  State  collects  its  income 
through  the  taxes,  and  expends  it,  so  far  as  it 
is  rightly  advised,  in  the  defence,  develop- 
ment and  improvement  of  the  services  it 
renders  to  society. 


CHAPTER  XII 

FOREIGN   TRADE 

A  CENTURY  and  a  half  ago  a  band  of  British 
immigrants  landing  in  North  America  made 
their  way  into  an  extreme  southern  part  of 
the  province  of  Ontario,  where  they  settled 
down  in  a  fertile  valley  traversed  by  a  river, 
along  the  banks  of  which  they  built  the 
clusters  of  log-huts  that  presently  grew  into 
a  populous  and  prosperous  village.  The 
north  side  of  the  river  had  most  of  the  better 
grazing  land,  and  a  creek  running  down  from 
the  neighbouring  hills  made  it  easier  to  work 
lumber  on  that  side.  But  the  south  side 
had  land  more  fertile  for  wheat  and  better 
protection  for  fruit  and  vegetables.  There 
were  specially  favourable  plots  of  soil  on  either 
side  under  the  shelter  of  the  hills,  which  took 
the  fancy  of  some  settlers,  and  other  advan- 
tages of  climate,  soil  or  position,  led  to  special 
sorts  of  cultivation  and  industries  connected 
with  them.  A  few  smiths,  carpenters,  weavers, 
tailors,  shoemakers,  settled,  according  to 
personal  convenience  or  family  connections, 
on  the  north  or  south  side  of  the  stream. 

231 


232     THE   SCIENCE   OF   WEALTH 

Remote  from  other  settlements,  this  village, 
with  its  neighbourhood  of  farmers,  lumber- 
men, etc.,  formed  a  virtually  self-supporting 
industrial  community.  There  was  a  bridge 
across  the  river  so  that  persons  and  goods 
passed  freely  to  and  fro,  and  market  arrange- 
ments enabled  every  special  advantage  of 
soil  or  position,  or  any  special  skill  which  some 
artisan  or  manufacturer  might  possess,  to  be 
most  fully  utilized  for  his  personal  gain  and 
for  that  of  the  whole  body  of  customers  who 
were  free  to  buy  what  he  had  to  sell.  Here 
was  a  simple  example  of  the  economy  of 
division  of  labour  on  a  basis  of  free  exchange. 
It  was  evidently  advantageous  for  the  villagers 
living  on  either  side  of  the  stream  that  there 
should  be  the  closest  contact  and  the  freest 
commercial  intercourse  over  the  bridge.  Any 
one  suggesting  that  the  bridge  should  be 
broken  down,  or  that  a  toll  should  be  set  up 
for  persons  and  goods  passing  across,  with 
the  object  of  enabling  each  side  to  supply  its 
own  needs  whenever  it  seemed  possible  to 
do  so,  would  have  been  dubbed  a  lunatic. 

Now  it  came  to  pass,  after  the  American 
revolution  had  led  to  the  establishment  of 
the  Republic,  that  a  delimitation  of  frontiers 
between  Canada  and  the  new  United  States 
took  place,  in  which  the  river  passing  through 
our  village  was  a  boundary  line.  Politically 
the  village  was  cut  in  two.  The  inhabitants 


FOREIGN  TRADE  233 

of  the  northern  part  remained  Canadian 
citizens,  obeying  the  laws  and  paying  the 
taxes  of  Ontario  as  heretofore,  the  inhabitants 
of  the  southern  part  became  citizens  of  the 
United  States.  In  process  of  time  the  political 
severance  would  possibly  affect  the  feelings 
of  the  two  sets  of  villagers  towards  one  another 
and  lead  to  a  diminution  of  social  intercourse. 
But  could  it  make  that  division  of  labour 
and  that  freedom  of  exchange,  which  were 
advantageous  formerly,  less  advantageous  ? 
Would  it  be  any  less  damaging  than  before 
to  break  down  that  bridge,  or  to  put  a  toll 
upon  the  produce  which  sought  a  market 
across  the  stream  ?  It  would  indeed  be 
feasible,  as  it  was  before,  to  break  the  economic 
community  into  two,  following  the  line  of 
the  river.  But  it  would  be  just  as  evident 
that  every  person  who  had  anything  to  sell 
would  have  only  half  the  market  he  had 
before,  while  for  everything  he  wanted  to 
buy  he  was  similarly  restricted  in  the  supply 
available  to  him.  It  might  be  possible  for 
all  the  villagers  to  supply  themselves  with  all 
they  needed  by  dealing  with  neighbours  on 
their  own  side  of  the  stream,  but  they  evi- 
dently lose  their  share  of  the  natural  advantages 
or  special  skill  belonging  to  some  villagers 
upon  the  other  side,  and  the  new  restrictions 
on  the  market  for  the  things  which  they  are 
in  a  superior  position  to  make  rob  them  of 
H  2 


234    THE  SCIENCE   OF  WEALTH 

part  of  the  fruits  of  their  own  industry. 
Each  villager  manifestly  loses,  both  as  buyer 
and  as  seller,  by  any  impediment  put  upon 
that  free  intercourse  which  existed  before. 

The  political  division  does  not  affect  the 
true  economy  of  industry.  It  was  advantage- 
ous before  that  the  young  men  and  women 
who  grew  up  on  the  north  side  should  be 
perfectly  free  to  take  up  land  or  a  trade  upon 
the  south  side  if  a  better  opportunity  presented 
itself  there  than  on  their  own  side.  Such 
liberty  of  movement  evidently  led  to  a  better 
development  of  the  whole  district,  an  advan- 
tage in  which  all  would  share.  Similarly,  if 
any  thrifty  farmer  on  the  south  had  laid  by 
a  sum  of  money  and  saw  a  better  use  for  his 
savings  by  putting  up  a  saw-mill  on  the 
north  side,  instead  of  starting  some  less 
likely  business  on  his  own  side,  it  would 
evidently  be  detrimental  to  the  interests  of 
all  the  villagers  on  either  side  to  stop  him 
from  this  most  profitable  use  of  his  capital. 
For  they  would  all  gain  more  by  the  cheaper 
timber  his  saw-mill  would  supply  than  by  any 
other  use  to  which  he  could  put  his  savings 
through  employing  them  upon  his  own  side 
of  the  stream.  Under  such  circumstances 
any  interference  with  the  free  flow  of  labour 
or  capital  is  seen  to  be  as  injurious  as  any 
interference  with  freedom  of  markets.  For 
the  inhabitants  of  either  or  both  sides  to 


FOREIGN  TRADE  235 

adopt  a  law  of  settlement  which  kept  the 
growing  population  to  its  own  side  of  the 
frontiers,  or  restrictions  upon  the  export 
of  timber  or  machinery  or  other  sorts  of 
"  capital,"  or  by  a  tariff  to  prohibit  or  impede 
the  importation  of  commodities  which  could 
be  produced  better  or  more  cheaply  on  the 
other  side,  would  manifestly  be  a  suicidal 
policy. 

If  the  villagers  upon  the  north  out  of 
some  mistaken  patriotism  adopted  such  a 
policy  of  exclusion,  they  could  damage  the 
villagers  of  the  south.  But  they  would 
damage  themselves  to  a  somewhat  greater 
extent,  because  the  costs  of  collecting  the 
tolls,  keeping  out  smugglers  and  administer- 
ing the  whole  protective  policy,  would  fall  on 
them.  Supposing,  however,  that  they  were 
so  foolish  as  to  attempt  this  economic  separa- 
tion, would  the  villagers  of  the  south  be 
well-advised  in  their  turn  to  meet  the  injury 
inflicted  on  them  by  copying  the  exclusion 
policy  ?  Why  should  they  stop  northern 
capital  which  sought  to  come  in  and  develop 
their  resources  from  doing  so,  or  stop  skilled 
labour  from  crossing  the  stream  to  help 
northern  capital  in  their  advantageous  work  ? 
Why  should  they  prevent  their  villagers 
from  getting  the  better  or  cheaper  produce 
which  the  northerners  still  sought  to  supply  ? 
To  follow  the  bad  example  of  the  north 


236     THE  SCIENCE  OF  WEALTH 

would  be  to  double  the  injury  for  their  citizens 
as  well  as  for  the  others,  and  to  saddle  them- 
selves with  the  same  costs  of  administering 
the  exclusive  policy. 

So  long  as  the  village  was  all  inside  Ontario, 
it  was  quite  obvious  that  the  fullest  co-opera- 
tion among  all  its  members,  by  division  of 
labour,  freedom  of  markets  and  full  liberty 
of  movement  for  capital  and  labour,  was 
conducive  to  the  common  welfare  of  the 
village  as  a  whole  and  of  each  section  of  it. 
It  might  be  true  that  the  soil  and  other  natural 
conditions  were  upon  the  whole  much  more 
favourable  on  the  south  than  on  the  north, 
and  that  consequently  the  young  labour  and 
the  new  savings  went  chiefly  to  the  develop- 
ment and  settlement  of  that  section.  But 
it  would  be  quite  evident  that  the  villagers 
who  stayed  on  the  northern  side  were  not 
made  worse  off  but  better  off,  by  reason  of 
the  fuller  development  of  the  better  resources 
on  the  southern  side,  and  that  if  any  foolish 
sentiment  had  operated  to  keep  their  young 
labour  and  the  savings  from  seeking  more 
profitable  employment  across  the  river,  they 
would  have  been  heavy  losers.  Now  this 
evident  economy  could  not  be  reversed  or 
even  modified  by  the  purely  political  event 
which  split  the  little  industrial  community 
into  two  political  communities.  What  was 
good  business  before  would  remain  good  now, 


FOREIGN  TRADE  237 

and  any  political  interference  with  the  liberty 
of  movement  for  men  and  goods  would  evi- 
dently injure  business.  For  if  either  of  the 
sections  of  the  village  could  be  advantaged 
by  restrictions  upon  free  movements  of  men 
or  goods,  it  might  equally  be  argued  that 
further  barriers  between  the  two  parts  of 
the  north  divided  by  the  creek  which  ran 
into  the  river  would  be  serviceable,  at  any 
rate  to  one  part  of  the  north,  and  this  policy 
of  subdivision  might  be  carried  so  far  as  to 
make  each  street  and  finally  each  family  a 
self-contained  individual  community. 

This  illustration  will  suffice  to  set  forth 
the  simple  and  sound  doctrine  of  industrial 
and  commercial  relations  between  nations. 
What  these  two  sections  of  the  frontier  village 
are  to  one  another,  are  also  the  two  nations 
to  which  they  relatively  belong,  Canada  and 
the  United  States.  If  an  unimpeded  flow 
of  capital  and  labour  and  products  is 
advantageous  for  both  sides  of  the  divided 
village,  so  is  it  for  the  two  nations.  And 
what  is  true  for  Canada  and  the  United 
States  is  true  for  any  other  nations,  whether 
possessing  a  common  frontier  or  not.  The 
inhabitants  of  every  country  benefit  by  the 
freest  possible  intercourse  with  all  other 
countries,  for  in  that  way  they  can  get  most 
wealth,  utilizing  most  completely  and  effect- 
ively any  special  qualities  of  natural  resources 


288     THE   SCIENCE   OF   WEALTH 

or  acquired  skill  they  may  possess,  and  sharing 
by  exchange  the  similar  advantages  which 
the  inhabitants  of  other  countries  possess. 

The  main  currents  of  modern  industrial 
life  involves  the  increasing  recognition  of  this 
truth.  Enormous  strides  in  modern  industry 
and  wealth  are  attributable  to  a  constant 
increase  in  the  fluidity  of  capital  and  labour 
and  commodities.  Local  markets  for  labour 
and  for  goods  give  place  to  markets  over 
larger  areas  :  the  suckage  of  labour  into  large 
industrial  towns  extends  over  the  whole 
country  :  modern  machinery  of  investments 
carries  capital  more  easily  over  the  whole 
range  of  national  industries.  But  the  flow 
does  not  confine  itself  to  the  limits  of  a  single 

o 

country  or  nation.  The  most  striking  feature 
of  the  last  generation  is  the  expansion  of 
economic  internationalism,  the  growing  forces 
that  are  conveying  capital,  labour  and  com- 
modities over  the  whole  earth,  so  as  to  develop 
more  fully  the  general  resources  of  the  earth, 
and  to  distribute  them  more  advantageously 
for  the  inhabitants  of  the  earth.  About  a 
half  of  the  new  savings  made  by  citizens  of 
Great  Britain  finds  a  more  profitable  use  in 
other  countries,  and  the  new  capital  of  France, 
Holland,  Germany,  and  other  advanced 
industrial  nations,  similarly  shows  a  tendency 
towards  increased  employment  abroad.  Most 
of  this  capital  has  gone  into  railways  and 


FOREIGN   TRADE  239 

other  developmental  work,  by  which  vast 
new  tracts  of  land  and  populations  in  South 
America,  and  elsewhere,  have  been  made 
accessible  as  growing  areas  for  the  world- 
supply  of  foods  and  raw  materials,  and  as 
markets  for  manufactures.  Much  capital  has 
also  been  loaned  to  foreign  governments  or 
to  municipalities,  and  when  the  primary  needs 
of  backward  countries  have  been  met,  foreign 
capital  flows  into  their  internal  industries  of 
manufacture  and  commerce.  Along  with  this 
flow  of  capital  has  gone  a  flow  of  labour  from 
the  more  congested,  or  less  fertile,  to  the  less 
congested  or  more  fertile  countries.  As 
might  be  expected,  the  streams  of  capital  and 
labour  have  generally  taken  the  same  direc- 
tion, the  flow  from  all  the  European  countries 
into  North  and  South  America  forming  by 
far  the  largest  instance  of  this  economic 
internationalism.  Not  less  significant  has 
been  the  corresponding  distribution  of  business 
ability,  engineers,  bankers,  merchants,  factory 
managers,  planters,  spreading  in  ever  growing 
numbers  over  the  industrial  world.  The 
common  object  and  result  have  been  to 
"  standardize  "  the  world,  so  far  as  the  roads, 
the  structure  and  equipment  of  cities  and  of 
the  leading  industries  are  concerned,  and 
even  to  force  up  towards  a  common  level  the 
practices  of  honesty  and  efficiency  for  govern- 
ment and  business  life. 


240     THE   SCIENCE   OF   WEALTH 

The  actual  increase  of  foreign  trade  and 
the  growing  relative  importance  of  that  trade 
for  every  country  form  an  aspect  of  this 
internationalism  closely  related  to  the  foreign 
investment  and  immigration  upon  which  we 
have  dwelt.  Though  Great  Britain  and  a 
few  of  the  continental  countries  are  in  advance 
of  the  rest,  the  inhabitants  of  every  country 
in  the  world  are  becoming  more  dependent 
upon  the  inhabitants  of  other  countries  for 
things  they  want  to  sell  and  buy.  Every 
year  larger  and  larger  quantities  of  goods 
flow  across  the  national  frontiers  and  seek 
purchasers  in  foreign  markets. 

Apart  from  the  ordinary  exchange  of  goods 
for  goods,  the  flow  of  capital  to  which  we  have 
alluded  involves  a  large  quantity  of  import 
and  export  trade.  Capital  invested  abroad 
goes  out  in  the  shape  of  goods,  for  we  have 
no  money  to  send  out,  and  it  is  not  money 
but  money's  worth  in  goods  that  foreign 
borrowers  want.  Investment  of  capital 
abroad,  therefore,  is  only  a  large  department 
of  our  export  trade,  implying  the  sale  abroad 
of  British  engines,  rails,  machinery  and  other 
British  manufactures,  sent  out  either  to  the 
country  where  the  borrowers  live  or  to  some 
other  foreign  land.  It  also  involves  imports 
coming  into  this  country  in  payment  of 
interest  on  the  capital,  and  eventually  in 
repayment  of  that  capital.  For  these  pay- 


FOREIGN  TRADE  241 

ments,  too,  will  mainly  be  made  in  the  shape 
of  goods.  A  very  large  proportion  of  the 
foreign  trade  of  Great  Britain  and  of  some 
other  countries  consists  of  this  flow  of  capital 
abroad  and  the  payment  of  interest  in  return. 

But,  apart  from  this,  there  is  a  growing 
interchange  of  goods  passing  by  ordinary 
process  of  exchange  between  countries  which 
are  different  in  their  resources  and  their 
industries  and  which  find  such  exchange  the 
cheapest  way  of  getting  what  their  people 
want. 

This  flow  of  the  factors  of  production  and 
their  products  across  national  barriers  is 
going  on  at  an  accelerating  pace,  and  has 
important  results,  political  as  well  as  eco- 
nomic. It  binds  members  of  different  political 
communities  more  closely  by  bonds  of  plain 
business  interest.  The  striking  fact  that  the 
people  of  Great  Britain  draw  not  much  less 
than  one-tenth  of  their  total  income  in 
interest  from  overseas  investments  is  not 
rendered  less  significant  by  the  knowledge 
that  the  great  bulk  of  this  income  is  enjoyed 
by  a  very  small  class  of  well-to-do  people. 
For  it  means  that  one-tenth  of  "  economic 
England,"  in  the  sense  of  the  property  owned 
by  Englishmen,  lies  outside  these  isles,  in 
various  parts  of  the  habitable  globe.  This 
means  a  powerful  interest  in  the  peace,  well- 
being  and  progress  of  those  foreign  countries, 


242     THE   SCIENCE  OF  WEALTH 

felt  by  those  Englishmen  who  own  this  pro- 
perty and  receive  this  income.  When  we 
reflect  that  the  growth  of  this  cross-ownership 
between  members  of  different  nations  is 
going  on  everywhere,  and  that  as  intelligence, 
ease  of  transport,  and  security  of  government 
increase,  so  will  this  cross-ownership  increase, 
we  cannot  fail  to  recognize  it  as  the  most 
powerful  material  factor  in  internationalism. 
As  its  chief  direct  effect  is  to  make  countries 
better  known  and  more  accessible  to  one 
another,  it  evidently  lays  the  foundation  for  an 
enlarged  and  more  regular  flow  of  ordinary 
trade. 

These  broad  world  tendencies  towards 
internationalization  of  industry  do  not,  how- 
ever, work  unimpeded.  Political  interests, 
real  or  imaginary,  impel  governments  in  many 
countries  to  place  obstacles  on  the  free  passage 
of  persons  or  of  goods  from  one  country  to 
another.  Considerations,  partly  social,  partly 
economic,  have  caused  some  new  countries 
to  impose  prohibitions  and  restrictions  upon 
immigration,  so  as  to  regulate  its  pace  and 
character.  This  has  operated  as  a  very 
considerable  check  upon  the  flow  of  labour 
from  Asia  into  the  United  States  and  our 
self-governing  colonies,  and  to  a  less  extent 
upon  immigration  from  European  countries. 
This  policy  has  been  motived  partly  by  the 


FOREIGN  TRADE  248 

determination  of  the  working  classes  in  new 
countries  to  defend  their  standard  of  wages 
and  of  living  against  the  competition  of  new- 
comers accustomed  to  a  lower  standard. 
Though  economists  point  out  that  the  usual 
effect  of  admitting  such  immigrants  has  been, 
not  the  displacement  of  native  labour,  but 
its  elevation  to  a  higher  level  of  employment, 
and  that  the  early  development  of  the  rich 
resources  of  such  lands  as  British  Columbia 
and  North  Queensland  is  impossible  without  the 
free  admission  of  lower  races,  such  arguments 
do  not  generally  prevail.  The  restrictive 
policy  is  defended  by  political  and  moral 
considerations  relating  to  the  difficulties  of 
assimilating  and  converting  into  good  citizens 
large  masses  of  aliens  of  widely  different  stock 
and  habits  from  those  of  the  existing  inhabi- 
tants of  the  country.  For  these  and  other 
reasons  considerable  checks  are  placed  upon 
that  free  fluidity  of  labour  which  seems  con- 
ducive to  world-industry. 

Most  modern  states,  partly  for  purposes 
of  revenue,  partly  because  they  wish  to  keep 
their  home  markets  for  their  home  producers 
and  to  make  their  country  as  economically 
self-supporting  as  possible,  impose  restrictions 
upon  the  free  importation  of  foreign  goods. 
Some  they  strive  to  keep  out,  others  to  admit 
with  duties  which  reduce  their  quantity  and 
raise  the  price.  The  tendency  towards 


244    THE   SCIENCE  OF  WEALTH 

periodic  gluts  under  modern  industrial  con- 
ditions has  impressed  upon  most  nations  the 
difficulty  of  finding  sufficient  markets  for  the 
goods  their  producers  can  turn  out,  and  has 
led  them  to  suppose  that,  by  keeping  their 
own  markets  to  themselves  as  much  as  possible 
they  were  increasing  the  total  quantity  of 
market  for  their  national  trades.  But  this 
they  cannot  do.  For  there  is  no  way  of 
increasing  either  the  total  wealth  or  the  total 
market  of  a  country  by  impeding  freedom 
of  exchange.  On  the  contrary,  every  impedi- 
ment must  diminish  the  average  productivity 
and  the  reward  of  capital  and  labour  inside 
the  protected  area,  as  was  evident  in  the  case 
of  our  divided  village.  It  is  only  by  looking 
at  one  trade  at  a  time,  or  trade  with  one 
country  at  a  time,  or  trade  for  a  brief  selected 
period,  or  by  some  other  "  separatist  "  and 
fallacious  consideration,  that  protection  can 
be  made  to  seem  a  profitable  economic  policy 
to  any  nation.  Certain  favoured  protected 
classes  or  industries  can  gain  at  the  expense 
of  others,  but  the  wealth  of  the  nation  as  a 
whole  must  be  diminished.  This  considera- 
tion of  wealth  may,  of  course,  be  offset  by 
some  other  consideration  such  as  national 
defence  or  variety  of  occupation.  But  it  is 
well  to  recognize  quite  clearly  that  any 
military  or  other  object  gained  by  a  protective 
tariff  must  be  paid  for  in  economic  wealth. 


FOREIGN  TRADE  245 

Much  confusion  of  thought  is  due  to  the 
habit  of  speaking  of  nations  as  if  they  were 
trading  bodies,  and  of  citing  records  of 
imports  and  exports  as  if  they  were  national 
balance  sheets  exhibiting  the  sales  and  pur- 
chases of  nations.  Nations  are  not  commercial 
units.  Germany,  Great  Britain,  the  United 
States,  do  not  trade  with  one  another,  nor  do 
they  compete  with  one  another  to  sell  to  other 
nations.  Certain  persons  or  firms  in  Great 
Britain  sell  to  or  buy  from  certain  persons 
or  firms  in  Germany  or  the  United  States, 
and  vice  versa.  German  firms  compete  with 
English  firms  for  orders  from  other  business 
men  in  England  and  Germany  or  elsewhere, 
but  the  competition  of  the  German  firms  with 
one  another,  and  of  the  English  firms  with 
one  another,  is  more  incessant  and  keener  than 
that  between  firms  of  different  nationality. 
Kent  hop-growers  fear  the  rivalry  of  Sussex 
hop-growers  more  than  of  French  or  Germans, 
and  would  benefit  much  more  by  their  exclu- 
sion or  taxation. 

The  false  notion  that  nations  trade  is 
accompanied  by  the  equally  false  notion  that 
in  the  processes  of  so-called  international 
trade  the  interests  of  the  several  nations  are 
opposed  to  one  another.  This  fallacy  is 
attributable  to  that  misconception  of  trade 
which  lays  more  stress  upon  the  selling  than 
the  buying  side.  Because  business  men  in 


246     THE   SCIENCE   OF   WEALTH 

the  same  trade  find  themselves  rivals  in  the 
markets  where  they  meet,  they  wrongly 
conclude  that  trade  is  composed  of  warring 
interests.  Yet  this  is  manifestly  false.  Our 
analysis  of  the  industrial  system  shows  it 
as  essentially  co-operative,  competition  only 
serving  as  an  instrument  in  the  co-operative 
process.  Only  by  isolating  the  selling  side  of 
a  business  does  trade  appear  in  essence  hostile. 
For  trade  does  not  consist  in  buying  or  in 
selling,  but  in  both  ;  it  consists  in  exchanges 
between  goods,  which  are  only  effected  by 
the  sale  of  one  set  of  goods  and  the  purchase 
of  another.  If  an  English  business  man  buys 
goods  from  a  German  firm,  he  compels  that 
German  to  buy  English  goods  which  would 
not  otherwise  have  been  bought,  or  to  get 
some  other  person  to  do  so.  If  an  English- 
man sells  goods  to  a  German,  he  compels 
some  English  firm  to  buy  German  or  other 
foreign  goods  which  would  not  otherwise  have 
been  bought.  Exactly  how  this  is  brought 
about  need  not  concern  us  here,  but  it  is 
evident  that,  since  money  does  not  pass 
between  the  two  countries  to  any  appreciable 
extent,  payment  for  goods  passing  from  one 
country  is  taken  in  goods  passing  the  other 
way.  Since  the  gain  of  trade  to  every  person 
engaged  in  it  comes  equally  by  selling  well 
and  by  buying  well,  it  follows  that  he  gains 
most  who  has  access  to  the  largest  and  freest 


FOREIGN  TRADE  247 

market  for  both  purposes.  And  since  a 
nation  consists  of  a  number  of  individuals 
whose  interests  thus  lie  in  selling  and  buying 
freely  in  the  world  market,  the  policy  is  also 
the  true  economic  policy  from  the  national 
standpoint.  A  state,  therefore,  which  pre- 
vents its  citizens  from  buying  or  selling 
abroad  as  freely  as  at  home,  injures  their 
economic  welfare,  reducing  the  aggregate 
wealth  of  the  nation. 

The  tariffs,  treaties  and  other  trade  policies 
which  states  adopt,  regulating  the  trade  done 
by  their  own  subjects  with  the  subjects  of 
foreign  states,  have,  however,  an  excessive  im- 
portance attached  to  them.  Considerable  as 
their  influence  is  in  determining  the  import  and 
export  trade  between  certain  countries,  they 
are  not  comparable  in  power  with  the  great 
economic  tendencies  towards  internationalism 
which  we  have  described.  The  real  interests 
of  investors,  merchants  and  wage-earners  lie 
in  the  direction  of  the  freest  possible  flow  of 
capital  and  labour  and  the  freest  possible 
exchange  of  goods,  and  the  magnitude  and 
variety  of  this  economic  intercourse  between 
the  different  countries  of  the  world  are  con- 
tinually increasing. 

One  point  relating  to  imports  requires 
attention.  It  is  sometimes  held  that  import 
duties  need  not  be  considered  impediments 
to  trade,  but  that  they  are  means  by  which 


248    THE   SCIENCE  OF  WEALTH 

foreigners  can  be  made  to  contribute  to  our 
public  revenue.  The  foreign  goods  will  come 
in  as  before,  paying  a  tax  which  will  not  raise 
their  price  but  will  be  taken  out  of  the  profits 
of  foreign  producers,  merchants  or  shippers. 
Now  the  validity  of  the  contention  can  be 
tested  by  the  general  law  of  taxation  derived 
from  the  distinction  between  costs  and  unpro- 
ductive surplus.  It  is  simply  the  question  of 
the  effect  of  taxing  different  sorts  of  goods. 
Whether  the  goods  taxed  are  foreign  imported 
goods  or  home  produce  makes  no  difference. 
If  a  tax  is  placed  upon  goods  produced  under 
such  competitive  conditions  as  keep  prices 
at  a  level  which  only  covers  the  ordinary 
costs  of  production,  it  cannot  be  defrayed  by 
the  producers.  For  it  will  check  production, 
reducing  the  supply  of  goods  and  raising  their 
price,  thus  throwing  the  burden  on  the  con- 
sumer. This  applies  equally  to  domestic  or 
to  foreign  goods.  If,  however,  there  are  cases 
where  imported  goods  sell  at  prices  which 
contain  a  "  surplus  "  over  the  necessary  costs 
the  foreigner  can  afford  to  pay.  If  his  own 
Government  has  neglected  to  take  advantage 
of  its  prior  opportunity  to  tax  his  "  surplus," 
a  foreign  Government  might  do  so  by  means 
of  import  duties.  But  only  in  such  excep- 
tional cases  can  the  foreigner  be  made  to 
pay. 


CHAPTER  XIII 

HUMAN   VALUES 

OUR  survey  of  industry  shows  us  an 
elaborate  system  of  businesses  and  trades 
by  which  the  productive  powers  of  Nature 
and  of  man  are  brought  into  operation  for 
the  supply  of  human  wants.  This  system 
exhibits  much  detailed  skill  of  adaptation 
and  co-operation.  The  harmony  of  structure 
and  of  working  in  an  ordinary  modern 
business,  a  factory,  a  mine,  a  bank,  a  shop, 
is  very  exact.  Though  the  owners  of  the 
different  factors  of  production  in  the  busi- 
ness are  mainly  moved  by  considerations  of 
personal  gain,  viz.  the  wages,  interest,  rent, 
profits  they  expect  to  receive,  there  is  a 
sufficiently  close  and  constant  harmony  of 
these  individual  interests  to  supply  a  sound 
business  economy.  Though  friction  causes 
some  evident  waste,  and  larger  disturbances 
sometimes  arise,  the  ordinary  business  works 
harmoniously  and  economically  at  most  times. 

When  we  turn  to  the  group  of  businesses 
which  form  a  trade,  and  to  the  series  of 

249 


250    THE  SCIENCE  OF  WEALTH 

trades  required  to  supply  some  sort  of  com- 
modity to  consumers,  we  still  find  a  remark- 
able amount  of  accurate  adjustment.  If  we 
consider  the  enormous  number  of  minutely 
divided  activities  required  to  furnish  London 
with  any  of  its  food  supplies,  the  working 
of  the  industrial  machinery  appears  mar- 
vellous. But  here  closer  inspection  shows 
much  greater  irregularity  and  waste.  Twenty 
businesses  are  often  engaged  in  doing  the 
work  which  ten,  or  even  five,  could  do  as  well; 
congestions  and  temporary  stoppages  of  con- 
siderable magnitude  occur;  there  is  a  good 
deal  of  miscalculation  and  of  misdirected 
energy.  The  economy  of  a  trade  structure  is 
evidently  less  exact  than  that  of  a  business. 
The  needs  of  humanity  require,  however, 
that  a  great  variety  of  trades  shall  produce, 
carry,  and  distribute  innumerable  goods  in 
the  proper  proportions  simultaneously  and 
continuously  at  ten  thousand  different  places. 
We  have  seen  how  this  is  achieved  by  the 
establishment  of  an  industrial  system  which 
sets  the  required  quantity  of  land,  capital, 
labour  and  ability  in  operation  at  each 
point  of  industry,  and  causes  the  new  flow 
of  capital  and  labour  to  repair  the  waste  and 
to  provide  for  growth.  Few  of  the  millions 
engaged  in  such  work  know  or  care  at  all  for 
the  larger  purpose  which  this  work  serves. 
The  farmer  in  Argentina  or  Alberta,  who  is 


HUMAN  VALUES  251 

preparing  bread  for  families  in  Manchester 
or  Dresden,  is  not  consciously  concerned 
with  any  step  beyond  his  bargain  for  delivery 
of  the  wheat  at  the  elevator  or  the  nearest 
railroad. 

As  we  pass  from  the  single  compact  business 
to  the  wider  system,  less  and  less  clear  con- 
scious purpose  appears  to  animate  the 
system.  And  yet,  as  we  see,  a  good  deal  of 
order  emerges  in  the  working  of  the  whole. 
This  order,  however,  is  attended  also  by  a 
good  deal  of  disorder.  The  modern  industrial 
system  as  a  whole  does  not  exhibit  anything 
like  the  same  degree  of  harmony  or  economy 
as  is  found  in  the  single  business.  This  is 
natural  enough.  For  we  saw  that  in  the 
business  a  single  control  existed  and  a  single 
dominant  purpose,  that  of  profit-making. 
Now  in  the  industrial  system  as  a  whole  there 
is  no  adequate  central  control  or  purpose. 
To  a  large  extent,  indeed,  finance  constitutes 
a  sort  of  central  power  station  for  the  dis- 
tribution of  capital  and  labour.  But  its 
grasp  is  very  partial,  and  its  methods  are  not 
accurately  adjusted  to  supply  the  general 
needs  of  industry.  The  central  purpose,  as 
we  see,  is  the  regular  supply  of  the  needs  of 
consumers.  And  it  is  this  purpose  which 
does  maintain  such  harmony  as  is  found  in 
the  industrial  system.  But  the  elaborate 
circuitous  ways  by  which  the  interests  of 


252    THE   SCIENCE  OF  WEALTH 

the  consumer  operate  through  the  veins  of 
industry  are  a  poor  substitute  for  the  keen 
interest  of  the  profit-maker  in  the  organiza- 
tion of  the  business  cell.  No  conscious 
controlling  motive  of  social  profit-making 
animates  the  whole. 

Some  indication  of  the  nature  and  some  of 
the  extent  of  this  harmony  and  discord  has 
been  given  in  the  distinction  between  costs 
and  surplus  which  our  analysis  disclosed. 
So  far  as  costs  of  maintenance  for  the  various 
factors  of  production  was  concerned,  we 
recognized  that  the  industrial  system  worked 
almost  automatically  and  accurately.  With 
regard  to  costs  of  growth,  though  there  was 
an  ultimate  harmony  of  interests  between  the 
factors,  present  considerations  of  gain  caused 
discords  to  arise,  a  scarcer  and  therefore 
stronger  factor  encroaching  upon  the  fund 
needed  for  the  growth  of  some  other  factor, 
and  taking  for  itself  some  surplus-gain.  The 
needs  and  claims  of  the  State,  we  also  saw, 
were  liable  to  similar  depredations  on  the  part 
of  a  powerful  factor  of  production. 

The  discord  and  waste  thus  caused  was  not, 
we  saw,  measured  merely  by  the  quantity 
of  surplus-wealth  thus  taken.  For  a  proper 
distribution  and  utilization  of  the  whole  pro- 
duct would  maintain  a  larger  volume  of 
production,  giving  full  regular  employment 
not  merely  to  the  existing  industrial  structure 


HUMAN   VALUES  253 

but  to  a  structure  enlarged  by  a  better 
apportionment  of  nutriment  to  the  separate 
parts. 

A  first  line  of  social-economic  reform  is 
suggested  by  such  analysis.  The  absorption 
and  social  utilization  of  the  whole  surplus,  by 
converting  the  unproductive  surplus  into  a 
productive  service  for  labour  and  the  State, 
would  secure  for  industry  as  a  whole  a 
harmony  resembling  that  which  prevails  in 
a  well -ordered  single  business.  Though  the 
owners  of  the  several  factors  of  production, 
and  the  several  businesses  and  trades,  would 
each  continue  to  endeavour  to  secure  for 
themselves  the  largest  payment,  the  economy 
of  distribution  which  prevailed  would  keep 
them  working  together  in  economy  and 
harmony.  This  is  the  ideal  which  laissez- 
faire,  operating  on  a  false  basis  of  unequal 
opportunity,  has  often  claimed  but  always 
failed  to  secure. 

But  in  no  case  could  mere  self-interest  of 
the  separate  factors,  however  enlightened, 
suffice  for  social  harmony  in  industry.  For  we 
have  seen  that  such  a  harmony  of  individual 
interests  leaves  out  of  account  the  claims 
of  society,  as  an  organic  whole,  expressed 
through  the  State.  Now  society,  we  recognize, 
must  be  considered  as  co-operating  every- 
where with  the  individual  owners  of  land, 
labour,  capital  and  ability,  and  as  entitled 


254     THE   SCIENCE   OF   WEALTH 

to  a  regulative  voice  in  industry  and  to  its 
share  of  the  industrial  product.  This  truth 
is  everywhere  finding  expression  in  the  en- 
larged economic  activities  of  modern  States. 
Though  there  is  no  general  tendency  or 
conscious  policy  vesting  in  the  State  the 
ownership  and  operation  of  all  industries,  the 
State  in  every  civilized  country  is  entrusted 
with  growing  regulative  powers  over  private 
industry,  designed,  first,  for  the  protection 
of  its  members,  as  workers,  consumers,  or 
citizens,  against  risks  or  injuries  incident  to 
profitable  processes;  secondly,  for  the  direct 
participation  of  the  public  in  the  wealth 
which  social  as  well  as  individual  energies 
have  helped  to  produce. 

The  complete  measure  of  State  Socialism 
is  commonly  applied  only  to  such  economic 
processes  as,  left  in  private  hands,  tend 
either  to  become  monopolies,  or  to  breed 
dangers  or  disorders  which  defy  mere  regula- 
tion. To  these  are  added,  in  some  countries, 
trades  which  are  made  convenient  instru- 
ments of  public  revenue.  Though  the 
economies  of  modern  capitalistic  production, 
and  growing  facilities  of  combinations  of  large 
businesses  drive  an  increasing  number  of 
trades  into  this  condition  of  monopoly  or 
defective  competition,  qualifying  them  for 
public  enterprise,  it  cannot  be  concluded  that 
these  concentrative  forces  are  of  universal 


HUMAN   VALUES  255 

or  of  general  application.  Moreover,  even 
in  cases  where  they  operate  powerfully,  the 
public  policy  in  dealing  with  them  will  be 
determined  by  the  capacity  of  the  State  to 
undertake  in  the  public  interest  the  conduct 
of  such  industries.  Where  the  State  feels 
competent  to  undertake  an  industry,  or 
where  the  difficulties  of  mere  regulation  seem 
too  great,  full  socialization  will  occur.  But 
when  the  State  does  not  possess  the  requisite 
strength,  skill  or  integrity,  the  social  interest 
may  be  better  secured  by  regulation  and 
participation  in  the  surplus  profits  of  the 
trade.  The  particular  industries  subjected  to 
one  process  or  the  other  will  vary  with  the 
degree  and  character  of  economical  and 
political  development  attained  in  the  several 
countries.  But  everywhere  the  State,  as  a 
social  instrument,  will  be  found  playing  a 
larger  economic  role  as  manager  or  regulator 
of  industry  and  as  participator  in  the  income 
which  it  yields. 

The  essential  meaning  and  value  of  these 
processes  lie  in  their  contribution  to  the 
wider  and  more  human  art  of  wealth.  This 
art  of  wealth  they  further  in  two  ways.  By 
removing  from  private  income  unearned  and 
excessive  elements  which  by  their  payment 
and  expenditure  represent  waste,  and  by 
applying  such  income  to  socially  serviceable 
uses,  they  impart  increased  health  and  vigour 


256    THE  SCIENCE  OF  WEALTH 

to  the  industrial  system  and  enlarge  the 
aggregate  of  satisfaction  it  affords  by  the 
consumption  of  the  product.  By  establishing 
a  more  adequate  central  direction  over 
industry,  commensurate  to  its  increasing 
complexity,  they  abate  the  waste  of  friction 
due  to  conflicts  of  interest  among  individuals 
and  groups,  and  make  for  the  production 
of  a  maximum  of  human  utilities  with  a 
minimum  of  human  costs. 


THE    END 


»  in  GREAT  BBIT»IH  »T  RICHAHD  CLAT  &  BOMS,  T.mim, 


Pelmanism  as  an 
Intellectual  and.  Social   Factor. 

IT  is  occasionally  urged  that  in  the  announce- 
ments of  the  Pelman  Institute  the  business 
element  is  predominant,  and  that  other 
aspects  of  Mind  Training  receive  less  considera- 
tion than  they  are  entitled  to. 

The  reason  for  this  is  fairly  obvious.  Business 
or  professional  progress  is,  in  this  workaday  world, 
a  subject  which  the  average  man  or  woman  has 
very  much  at  heart.  Consequently,  the  financial 
value  of  Pelmanism  is  the  point  of  primary  attrac- 
tion for  probably  60  per  cent,  of  those  who  enrol ; 
but  this  circumstance  does  not  in  any  degree  dis- 
possess Pelmanism  of  its  supreme  importance  as 
an  educational  and  intellectual  factor.  Instead  of 
a  few  pages  of  explanation,  a  fairly  lengthy  volume 
would  be  required  to  do  justice  to  this  theme — 
the  higher  values  of  Pelmanism. 

Far-seeing  readers  will  be  quick  to  appreciate 
this,  and  will  recognise  that  a  system  which  has 
proved  of  such  signal  value  to  the  business  and 
the  professional  brain-worker  must  perforce  be  of 
at  least  equal  value  to  those  whose  occupation  is 
mainly  intellectual  or  social.  If  assurance  were 
needed  upon  this  point,  it  is  abundantly  supplied 
by  the  large  number  of  complimentary  letters 
received  from  those  who  have  enrolled  for  the 
Course  from  other  than  pecuniary  motives :  the 
amateur  and  leisured  classes  being  well  repre- 
sented on  the  Registers  of  the  Institute. 

In  many  cases,  those  whose  motive  originally 
was  material  advancement  of  some  kind  have  been 
quick  to  discover  the  deeper  meanings  and  higher 


values  of  Pelmanism — a  value  far  above  money. 
It  would  be  proper  to  say  that  there  are  many, 
thousands  of  both  sexes  to  whom  the  Pel  man 
System  has  been  the  means  of  intensifying  their 
interest  and  pleasure  in  existence  as  probably  no 
other  agency  could  have  done. 

The  charms  of  literature,  and  in  particular  the 
beauties  of  poetry  and  descriptive  writing,  are 
appreciated  by  those  who  adopt  Pelmanism  as 
they  never  appreciated  them  before.  Every  phase 
of  existence  is  sensibly  expanded.  Life  receives 
a  new  and  deeper  meaning  with  the  unfolding  of 
the  latent  powers  of  the  mind. 

In  developing  latent  (and  often  unsuspected) 
powers  of  the  mind,  Pelmanism  has  not  infrequently 
been  the  means  of  changing  the  whole  current  of 
a  life. 

Again,  there  are  numbers  who  avow  their 
indebtedness  to  the  Pelman  Course  in  another 
direction — it  has  led  them  to  examine  themselves 
anew,  to  recognise  their  points  of  weakness  or 
strength,  and  to  introduce  aim  and  purpose  into 
their  lives.  Indeed,  it  is  surprising  how  many  men 
and  women,  including  some  of  high  intellectual 
capacity  and  achievement,  are  "  drifting  "  through 
life  with  no  definite  object.  This  reveals  a  defect 
in  our  educational  system,  and  goes  far  to  justify 
the  enthusiasm  of  those — and  they  are  many — 
who  urge  that  the  Pelman  System  should  be 
an  integral  part  of  our  national  education.  Self- 
recognition  must  precede  self-realisation,  and  no 
greater  tribute  to  Pelmanism  could  be  desired 
than  the  frequency  of  the  remark,  "  I  know  myself 
now  :  I  have  never  really  done  so  before." 

As  a  system,  Pelmanism  is  distinguished  by  its 
inexhaustible  adaptability.  It  is  this  which  makes 


it  of  value  to  the  University  graduate  equally  with 
the  salesman,  to  the  woman  of  leisure  and  to  the 
busy  financier,  to  the  Army  officer  and  to  the 
commercial  clerk.  The  Pelmanist  is  in  no  danger 
of  becoming  stereotyped  in  thought,  speech,  or 
action :  on  the  contrary,  individuality  becomes 
more  pronounced.  Greater  diversity  of  "  char- 
acter" would  be  apparent  amongst  fifty  Pelmanists 
than  amongst  any  fifty  people  who  had  not  studied 
the  Course. 

The  system  is,  in  fact,  not  a  mental  strait-jacket 
but  an  instrument:  instead  of  attempting  to  impose 
universal  ideals  upon  its  students,  it  shows  them 
how  to  give  practical  effect  to  their  own  ideals 
and  aims.  It  completes  man  or  woman  in  the 
mental  sense,  just  as  bodily  training  completes 
them  in  the  physical  sense. 

There  are  many  who  adopt  it  as  a  means  of 
regaining  lost  mental  activities.  Elderly  men  and 
women  whose  lives  have  been  so  fully  occupied 
with  business,  social,  or  household  matters  that 
the  intellectual  side  has  been  partly  or  wholly 
submerged :  successful  men  in  the  commercial 
world  whose  enterprises  have  heretofore  left  them 
too  little  leisure  to  devote  to  self-culture :  Army 
officers  who  find  that  the  routine  of  a  military  life 
invites  intellectual  stagnation — these  find  that  the 
Pelman  Course  offers  them  a  stairway  up  to  the 
higher  things  of  life. 

Here  are  two  letters  which  emphasise  this.  The 
first  is  from  an  Army  student,  who  says : 

The  Course  has  prevented  me  becoming  slack 
and  stagnating  during  my  Army  life — this  is 
a  most  virulent  danger,  I  may  add.  It  incul- 
cates a  clear,  thorough,  courageous  method  of 
playing  the  game  of  Life — admirably  suited 


to  the  English  temperament,  and  shoulc 
prove  moral  salvation  to  many  a  business  man 
"Success,"  too,  would  follow — but  I  conside 
this  as  secondary. 

The  other  letter  is  from  a  lady  of  independen 
means  who  felt  that,  at  the  age  of  fifty,  her  mine 
was  becoming  less  active : 

Though  leading  a  busy  life,  my  income  is  in 
herited,  not  earned.  My  object  in  studying 
Pelman  methods  was  not,  therefore,  in  am 
way  a  professional  one,  but  simply  to  improvt 
my  memory  and  mental  capacity,  which,  a 
the  age  of  fifty,  were,  I  felt,  becoming  dul 
and  rusty. 

I  have  found  the  Course  not  only  most  interest 
ing  in  itself,  but  calculated  to  give  a  menta 
stimulus  and  keenness  and  alertness  to  one' 
mind,  which  is  just  what  most  people  feel  tli 
need  of  at  my  age. 

In  short,  it  is  not  merely  the  fleeting  interes 
of  a  day  that  is  served  by  the  adoption  o 
Pelmanism,  but  the  interest  of  a  lifetime.  Oni 
may  utilise  the  Course  as  a  means  of  achieving 
some  immediate  purpose — financial,  social,  educai 
tional,  or  intellectual, — but  the  advantages  of  thi 
training  will  not  end  there.  The  investment  o! 
time  will  bear  rich  fruit  throughout  life,  and,  i:< 
addition  to  serving  a  present  purpose,  will  enabli 
many  a  yet  unformed  ideal  to  be  brought  withi: 
the  gates  of  Realisation. 

"  Mind  and  Memory "  (in  which  the  Pelmet: 
Course  is  fully  described,  with  a  synopsis  of  th 
lessons)  will  be  sent,  gratis  and  post  free,  togetlie 
with  a  full  reprint  of  "  Truth's"  Report,  on  applica 
tion  to  The  Pelman  Institute,  E,  Pelman  Houst 
BJoomsbury  Street,  I^ondon,  W.C.  1. 

I'KIMTED   IN  GREAT   BRITAIN   BY   NULL  AND   CO.,    LTD.,    EDINBURGH. 


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